National Foods feels the pinch of VAT changes

NATIONAL Foods says it recorded an approximate six percent increase in its overall monthly operating costs, as Value Added Tax (“VAT”) status of many basic foods changed from “Zero-Rated” to “Exempt” in early 2024.

This change meant that, consumers will not be charged VAT on these products during purchase, while manufacturers like National Foods can no longer reclaim the VAT input costs associated with the production of these goods, which adversely impacted their overall expenses in the 2024 financial year.

In response to these rising operational costs, National Foods however indicated that it is committed to absorbing these increases whenever possible, striving to maintain stable selling prices.

The Group also highlighted that it remains dedicated to producing affordable, high-quality products that meet the needs of consumers, even in the face of challenging financial conditions.

In a noteworthy effort to alleviate the economic burdens faced by Zimbabweans, the Government announced the suspension of Value Added Tax (VAT) on essential food items, a measure that took effect on February 1, 2024.

This initiative was formalised through the publication of Statutory Instrument 10A of 2024, which outlines the VAT exemption for vital grocery staples.

Items included in this exemption encompass bread, milk, cooking oil, and maize meal, which are basics to many households. Other basic commodities such as meat, rice, bath and laundry soap, washing powder, toothpaste and petroleum jelly were moved to standard rating, to minimise price increases, thereby seeking to protect consumers from steep price hikes.

The introduction of this VAT exemption was the result of the Government’s decision following concerns expressed by business leaders, who warned that the original VAT measures proposed in the 2024 National Budget could inadvertently lead to increases in the prices of essential goods, further stretching the budgets of consumers already facing economic pressures.

Finance, Economic Development and Investment Promotion Minister Mthuli Ncube addressed these pressing concerns by publishing Statutory Instrument 10A of 2024 in a supplementary Government Gazette.

This regulation serves to amend the Customs and Excise (Suspension) Regulation 2003, which was initially detailed in Statutory Instrument 257 of 2003.

By eliminating VAT on these essential food products, the Government aims to reduce the financial strain on citizens, ensuring that fundamental grocery items remain accessible and reasonably priced for all.

However according to National Foods this change in VAT status have resulted in a notable and direct increase of around six percent in the Group’s all-in monthly operating costs.

“The operating environment remained fluid, dynamic and challenging during the year. It was disappointing that the Value Added Tax (“VAT”) status of many basic foods (including maize meal, flour, stockfeed and salt) was changed early in 2024 from “Zero-Rated” to “Exempt”.

“This change meant that although VAT is not charged when selling the product, the manufacturer can no longer claim the VAT input costs incurred in the production of these goods.

“This change in VAT status has caused a substantial and direct growth of around six percent in the Group’s all-in monthly operating costs. The Group continues to apply every effort to avoid increasing selling prices, with a strong focus on consistently producing affordable, quality products for consumers,” said Edwin Manikai the National Foods chairperson.

According to National Foods, the situation is even more concerning when taking account of the fact that VAT legislation was only changed mid-way through the financial year.

However, the Group remains hopeful that the authorities will review and reconsider their position on the VAT status of basic products across the market, given the disproportionate impact this policy has

Operationally during the 2024 financial year, National Foods posted a five percent revenue growth to US$359, 36 million.

Operating profit before depreciation, financial loss, interest, equity accounted earnings and tax for the current year was US$24, 34 million, four percent above the prior year.

The Group’s profit before tax increased by 95 percent over the prior year to USD 19.06 million; this was a pleasing overall result.

Gross margin increased by 13 percent to US$81, 64 million, driven largely by procurement and operating efficiencies, which resulted in a three percent reduction in the bill of materials over the prior year.

Cost of sales improvement was largely offset by a 17 percent increase in operating costs over the prior year mainly influenced by the increase in power costs and non-claimable VAT.