Smuggling suffocates cooking oil industry

Cooking oil manufacturers have expressed displeasure over massive influx of smuggled cooking oil into the country from Malawi’s neighbours, a situation they argue has severely suppressed demand for their locally-produced commodity.

In an interview with Nyasa Times yesterday, Edible Cooking Oil Association of Malawi (ECOAM), also bemoaned that most cooking oil consumers have resorted to smuggled, cheaper and sub-standard cooking oil, thereby benefiting neighbouring countries in terms of increased sales and employment levels in those countries, at the expense of Malawi.

Nyasa Times investigations reveal that for the past 18 years, Mozambique has been exempting cooking oil, sugar and soap from Value Added Tax (VAT), while Zambia has suspended VAT on edible oils now for four months in bid expected to contain escalating cooking oil prices in that country.

ECOAM wants Treasury remove the prevailing 16.5 percent VAT on cooking oil, which it argues will help curb smuggling of the commodity but also helping to create more jobs in the industry, among other multiplier effects.

In a letter that Nyasa Times has seen, titled “request to review the re-introduction of Vat on refined cooking oil,” and addressed to Secretary to Treasury, ECOAM says since re-introduction of the tax to the commodity, the demand for the product had dropped by 40 percent by January 2021, adding that “the situation is worse now.”

ECOAM chairperson, Jayshree Patel complains in the letter that the re-introduction of the tax has now backfired as it has seen triggered an increase in the smuggling of re-fined cooking oil from neighbouring Mozambique, Zambia and Mozambique through a long stretch of porous borders that cannot be easily be policed by Malawi.

In the 2020/21 national budget, Tonse government brought back the VAT on cooking oil, a tax which was exempted on the product between 2017 and 2020.

“As from 2017 to 2020 when the VAT was removed, the smuggling of cooking oil was close to eradication as local producers’ pricing was less or at par to the smuggled cooking oil prices and it is our belief that if the VAT is removed, the smuggling and retrenchment will be on check.

“The demand for cooking oil will be back to normal and this will allow companies to operate and continue with their future plans of expansion in the production capacities,” says Patel in the letter.

He also says with the current status quo, all the 2020 investments that the shareholders of the company have done “have gone to waste” as the demand have drastically dropped, adding that the deposits paid to the suppliers for the 2021 expansion plans will be sized by the suppliers as the companies would have to cancel the orders.

‘Taking cognisance’

According to the ECOAM, if Treasury rescinds its decision on VAT on cooking oil, the move could see the cooking oil industry creating up to 2000 more jobs.

On his part, Jayesh Sharma who is financial controller for Sunseed Oil Limited-one of Malawi’s major cooking oil processing firm, said they are worried that cooking oil companies are on the verge of losing all the market share to Zambian and Mozambican companies who are producing the same commodity without VAT.

But global edible oil market dynamics show that prices for the commodity have risen as much as 62 percent in the last year as bad weather in major producing countries and increasing use of biofuels have hit global supply.

Prices of edible oils such as mustard, vanaspati, soya, palm, sunflower, and groundnut are more than their highest in a decade.

The United Nations (UN) Food and Agriculture Organization’s (FAO), food prices in May 2021 were 4.8 percent higher than April – the biggest monthly rise since October 2010 – and 39.7 percent higher than this time last year, May 2020.

The FAO food price index tracks prices around the world of a range of food including cereals, oilseeds, dairy products, meat and sugar.

Consumers Association of Malawi (Cama) executive director John Kapito said recently that he was not amused with “misleading information” from some players in the edible oils industry.

With regards to the reintroduction of Vat on cooking oil, Kapito said cooking oil producers, directly and indirectly through their association, have failed to provide consumers with any justification for their call to have VAT exempted on cooking oil compared to other products such as water and electricity.

Kapito said the association has also failed to demonstrate with facts how the reintroduction of 16.5 percent VAT has resulted to the huge price increases of more than 50 percent.

“Cama has realized that most of their arguments are fictitious… We have discovered that there are price increases of crude oil on the global market. Crude oil is widely used locally in the refining of cooking oil hence the local shelf prices of cooking skyrocketing substantially.

“Therefore, the massive increases of cooking oil in Malawi are as a result of the high import prices of crude oil,” said Kapito.

He added: “The choice to import crude oil and using the hard-earned foreign exchange is the blatant disregard of the country’s local farmers, who have the capacity to produce most of the raw materials such as Soya beans, sunflower and groundnuts used in the production of cooking oils.”

In his 2021 National Budget presentation in Parliament last September, Finance Minister Felix Mlusu has had said cooking oil manufacturers need not raise prices of their commodities since tax measures will enable them to claim input VAT when one purchases goods or services liable to VAT.

But when the manufacturers still increased the prices, they lobbied to the Finance Minister through a letter dated September 14 to review or withdraw the VAT as it might trigger serious negative multiplier effects in the economy.

Edible Cooking Oil Association of Malawi, a grouping of five manufacturers, also argued that if the price of the products was to be increased, it will allow room for massive smuggling of the product from neighbouring Mozambique, Zambia and Zimbabwe where there is no VAT applied on it.

Initially, CAMA had joined the condemnation of the tax measure believing it was indeed through the re-introduction of VAT until now when the consumer watchdog did its own analysis — in which it agreed with the Finance Minister.

In his Budget presentation in Parliament, Minister Mlusu had said the introduction of the standard rate of 16.5% VAT on refined cooking oil was to ensure efficiency in the VAT system — taking cognisance that previously the commodity was VAT-exempt and manufacturers were not able to claim tax refunds on their input VAT.

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