We do not do a single piece of work in the clothing and textile industry, but I can’t seem to let this new rebate go. When I wrote my last blog on this, the guidelines and rules were not yet published. They now are, and just like you can’t stop your tongue prodding a loose tooth, I just had to ruin a perfectly good Sunday morning to dig deeper. And the more I read, the more alarmed I have become. This blog is a deep dive into this new rebate and what I fear, will be a future on increasingly complex trade policies. My original post is here, if you want to catch up before reading this piece.
At high level, this works like any other rebate. You can import goods which attract duty and not pay the duty, if you use them to manufacture some qualifying item. So far, so good, however the list of tariff codes eligible for the rebate cover everything from in Section XI of the 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 which 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 and then manufacture something classified in Chapters 61 and 62 (Articles of apparel and clothing accessories), then you are over the first hurdle. Unfortunately there are a very long row of hurdles to still cross to actually see any benefit.
Hurdle 1: The market you sell into
You can only sell items made with the imported raw materials if ITAC, or its equivalent in the other SACU countries, which mostly it does not have, are satisfied that you will only supply to retailers who will only sell the goods in the country they are manufactured. There are 274 tariff codes in these 2 chapters, of which 264 attract a duty.
Unless you buy all of 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 like Mauritius and Madacascar, which supplied R1.9bn and R1.3bn worth of apparel into South Africa in the same period 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 South Africa. However, you can manufacture the whole garment in Mauritius (in fact any SADC country outside of SACU) from Chinese raw materials and export into the SACU region duty-free.
The report into this investigation says these export restrictions are “to deepen the value chain in SACU”, which is astonishing given 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 R-CTFL Masterplan and have signed the Masterplan or do in future and that have concluded the necessary off-take agreements”.
Hurdle 2: 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 onto 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, its not clear what happens if you want a particular design, which 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 South African 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 2 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, which may never fly again).
2 weeks after this, Off-take Agreements have to be concluded between retailers and the textile mills.
If any disputes arise in resolving these agreements, then this is referred to the ORT, which is made up “a representative of each of the National Clothing Retailers Foundation, the South African 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 of these commitments are then sent to the ORT who collate all this information so that they now know 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 which are subject to the Off-take Agreement, then 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 shit you not.
Hurdle 3: 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 then apply to ITAC for your rebate permit and ITAC is given at least 14 days to assess your application. If they decide to issue you with a permit, you will be told what period the permit is valid for and this could be shorter than the period you asked for at the discretion of ITAC. In other words, if you need a permit for use the rebate for 6 months and ITAC decide you really only need 3 months, then your permit will expire after 3 months.
Hurdle 4: 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 of the volume allocated to you, you cannot trade this permit to anyone else. It will simply expire.
Hurdle 5: 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 its entirely up to them if you will get it or not.
Hurdle 6: 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 which you will add value to, such permissable 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 who belong to the bargaining council and who have signed up to the Masterplan.
Hurdle 7: 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 4 complicated conditions are met. If you want the details, contact me. I am already exhausted and am only on page 7 of the 14 page document of rules.
Hurdle 8: All the other shit you have to do
- You have to meet regularly with the DTIC’s Project Management Office (PMO), 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 then 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 South Africa).
- The retailer’s purchase order is described in some detail and if it doesn’t contain all the requisite information, then it is not acceptable.
- An undertaking 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 9: 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.”
Need help with what is definitely the most complex piece of trade legislation in the country? Contact me on email@example.com