The tangled warp and weft of the textile industry
Rebates, tariffs, markets, permits — the list of hoops required to be jumped through is long, with criminal charges as a possible coda
The more I read about the department of trade, industry and competition’s new textile import rebate regime the more alarmed I become. On the face of it, the rebate works like any other rebate. You can import goods that attract duty and not pay the duty if you use them to manufacture some qualifying item.
So far, so good, except the list of tariff codes eligible for the rebate covers the entire section XI of the Customs & Excise Tariff Book (textile and textile items). The tariff book has 98 chapters, broken up into 22 sections. Section XI covers chapters 50 to 63. These 13 chapters contain 1,010 tariff codes, of which 825 attract a duty of more than zero. These 825 tariff codes are the ones that concern us. Their duties range from 7.5% to 45%, so the value of the rebate can prove to be rather significant.
If you import something under these tariff codes then manufacture something classified in chapters 61 and 62 (articles of apparel and clothing accessories), you are over Hurdle One. Unfortunately, there is a long series of hurdles still to cross to actually see any benefit.
Hurdle Two: The market you sell into
You can only sell items made with the imported raw materials if the International Trade Administration Commission (Itac), or its equivalent in the other Southern African Customs Union (Sacu) countries, are satisfied you will only supply to retailers that will sell the goods in the country where they are manufactured. There are 274 tariff codes in these two chapters, of which 264 attract a duty.
Unless you buy all your raw materials locally, or you pay the duties, you will not be allowed to export. In 2019, we exported R5.9bn worth of product through these chapters. We also imported R4.8bn from the other Sacu countries. Given that this rebate only applies to raw materials imported into Sacu, an interesting opportunity is presented to countries such as Mauritius and Madagascar, which supplied R1.9bn and R1.3bn worth of apparel into SA in the same period, respectively, and also enter the Sacu region duty-free.
Let’s pause a moment and consider this. If you import the raw materials into Sacu and you benefit from the rebate, you can only sell the finished product in the country you manufactured in. You cannot make the item in Lesotho and bring it into SA. However, you can manufacture the whole garment in Mauritius (in fact any Southern African Development Community country outside Sacu) from Chinese raw materials and export into the Sacu region duty-free.
The Itac report into this investigation says these export restrictions are “to deepen the value chain in Sacu”, which is astonishing given that the rebate does exactly the opposite and in fact breaks the value chain. But the insanity doesn’t end here. Before the rebate permit will be issued, the manufacturer must produce orders from retailers in the country of manufacture.
But not just any retailer will do. You are also only allowed to sell to retailers “that have made local procurement commitments in terms of the retail, clothing, textiles, footwear and leather (R-CTFL) master plan and have signed the master plan or do in future and that have concluded the necessary off-take agreements”.
Hurdle Three: Reciprocal off-take agreements
If you want to access the rebate you not only need to also be purchasing from the local suppliers by way of an off-take agreement; you may not reduce the value and volume you buy from the local textile mills if you wish to hang on to your rebate. In other words, any imports can only be in addition to what can be supplied by the local mills.
Given that you are making clothing from the textiles you purchase, it’s not clear what happens if you want a particular design that is not available locally. Do you need to just keep buying volumes of other designs to ensure you don’t reduce your off-take? Do you just not do the new design (don’t worry though, it turns out you only need to worry about SA fashion preferences, because you can’t export if you use the rebate).
Never fear. In return for the off-take agreement, the textile mills are not allowed to increase their prices beyond inflation. Within two weeks of the implementation of the rebate, producers of the applicable textiles have to submit off-take claims to the off-take resolution team (ORT — not to be confused with the airport, where very little is also happening, except for the washing of SAA planes that may never fly again). Two weeks after this, off-take agreements have to be concluded between retailers and the textile mills.
If any disputes arise in resolving these agreements this is referred to the ORT, which is made up “a representative of each of the National Clothing Retailers Foundation of SA, the Southern African Clothing and Textile Workers Union, and the department of trade, industry and competition, and from the woven textile sector.”
The off-take agreements must be signed off by the respective manufacturers of clothing. All these commitments are then sent to the ORT, which collates all this information so it now knows how much each retailer is committing to each mill and how much, in total, each mill has to supply. Itac will only begin issuing permits when 90% of the off-take requests have been resolved.
If there are no continued orders for fabrics that are subject to the off-take agreement, the retailer and clothing manufacturer must “explore appropriate options in an attempt to meet or exceed commitments contained in the relevant off-take agreement”. I kid you not.
Hurdle Four: No predefined period for the rebates
To actually get the rebate you first need to register with Sars as a rebate user. Once that is done you apply to Itac for your rebate permit and Itac has at least 14 days to assess your application. If it decides to issue you with a permit you will be told what period the permit is valid for, which could be shorter than the period you asked for at the discretion of Itac. In other words, if you need a permit to use the rebate for six months and Itac decides you really only need three months, your permit will expire after three months.
Hurdle Five: The rebate permits cannot be transferred
The rebate permit can only be used by the applicant. If you are nearing the end of the rebate period on your permit and you realise you won’t use all the volume allocated to you, you cannot trade this permit to anyone else. It will simply expire.
Hurdle Six: Extending the permit
Note hurdle 4. If you are getting close to the end of the period of your permit and you realise you won’t make the deadline, but you think you can still use the permit later on, you can approach Itac, but you must do this before the permit expires. You also have to motivate to Itac why you need the extension, and it’s entirely up to the commission if you get it or not.
Hurdle Seven: The bargaining council
Importers of fabric under this rebate must be “clothing manufacturers with compliance certificates from the National Bargaining Council for the Clothing Manufacturing Industry”. This immediately removes many of the smaller producers.
If you are a textile mill importing raw material that you will add value to — such permissible value-adding options being described in excruciating detail — you, too, must belong to the bargaining council and can only sell your fabric to clothing manufacturers that belong to the bargaining council and have signed up to the master plan.
Hurdle Eight: Ease up on the outsourcing
“Clothing manufacturers would be allowed to outsource a maximum of 50% of their production.” Design houses can outsource 100% of their production. Design houses and manufacturers are then defined in detail. Outsourcing can only happen if a number of complicated conditions are met.
Hurdle Nine: All the other stuff
- You have to meet regularly with the department’s project management office, not be confused with the ORT, where you will be told how to increase your consumption of yarn and fabric.
- You have to be successful. If your economic performance doesn’t improve you can’t keep getting the rebate.
- You have to create jobs (easily done when all the experienced people lose their jobs in Lesotho and arrive in SA).
- The retailer’s purchase order is described in some detail and if it doesn’t contain all the requisite information it is not acceptable.
- An undertaking must be made that if you get the rebate you will still keep buying at the committed volumes from local mills.
- Your statutory auditors have to confirm your improvement in performance, jobs created, extra production and changes in cost because of the rebate. Thank god they don’t ask for export improvement, because that is now not allowed.
Hurdle 10: You can face criminal charges if you don’t comply
“If it is established that non-compliance took place, appropriate steps will be taken. These steps will be taken in terms of the International Trade Administration Act and the Customs and Excise Act and can include criminal charges, withdrawal of the permits or permits concerned.”
• MacKay, a former associate director of the Deloitte SA tax division, is founder and director at XA International Trade Advisors.
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