Taking the Shein off cheap e-commerce fashion as SARS moves to close tax loopholes

By Carlyn Frittelli Davies, Mansoor Parker and Busisiwe Vilakazi

18 Sep 2024

Governments globally are grappling with tax systems to protect local industries from supposedly affordable fast fashion. The volumes of clothing and other goods being moved around the world have increased exponentially as e-commerce platforms grow.

The fashion industry’s battle between profit, people and planet has reached the international stage. Legislative regulation has entered the arena and is taking different forms across nations.

The impacts are obvious – mounting textile waste in the global South, ongoing garment worker exploitation and unfair competition for local industries which threatens economic stability.

Locally, South African consumers have expressed dissatisfaction with the SARS’ announcement – in reaction to the request by the retail clothing textiles, footwear and leather sector (RCTFL) – that clothing imported through e-commerce platforms such as Shein and Temu have attracted VAT from 1 September 2024, and full customs duties of 45% from 1 November 2024.

This type of government reaction is not limited to South Africa as countries clutch at tax systems to protect local industries from supposedly affordable fast fashion.

Customs duties are imposed on certain imported goods to protect specific local industries and generate funds for the government. Following a global increase in trade in small-value goods primarily transported through courier and express mail services, in early 1990 the World Customs Organisation published guidelines for the immediate release of consignments by customs to expedite the clearance of such goods.

The Immediate Release Guidelines provided a basis for SARS’ implementation of a concession imposing a flat rate of 20% in custom duties on items valued below R500, and exempting such items from the payment of value-added tax (VAT).

But since the 1990s, e-commerce platforms have expanded exponentially, leading to increased imports of “small” value goods, including fast fashion items.

The SARS’ concession does not apply to manufacturers and retailers in the local RCTFL industry who pay full customs duties and VAT on the importation of high-volume and high-value consignments. The SARS’ concession applied to “small” value goods has perpetuated the notion that fast fashion is “affordable”, and has resulted in an unfair advantage for e-commerce platforms to the detriment of our local RCTFL industry.

SARS has estimated that these loopholes and the increase in global e-commerce trade have resulted in tax losses of R3.5-billion.

The latest trend catching the attention of the European Union (EU) is the so-called extended producer responsibility (EPR) scheme for textiles. An EPR mechanism aims to hold producers, and often importers, brand owners and in some instances retailers, responsible for the entire life-cycle of a product.

The ultimate goal is a “cradle-to-cradle” as opposed to a “cradle-to-grave” fate for products included in the EPR scheme.

The shift from a linear production to a circular one is supported through levies to ensure proper disposal and, preferably, recycling and upcycling of products as well as incorporating technology and design into production to avoid waste. The EPR levy functions as a type of tax, paid to the entity managing the recycling and disposal of the regulated product.

Although Italy, the Netherlands and Sweden have recently implemented or started implementation of EPR schemes for textiles, France, a trailblazer in the fashion world, started its EPR scheme for textile products, household linen and footwear in January 2007.

The French EPR scheme for textiles charges a mere €0.01-€0.06 per clothing item and sadly these measures have not been enough to curb overconsumption for various reasons, including the lack of infrastructure required to recycle and upcycle the collected clothing. Perhaps the failings of the French EPR system will allow learnings for future schemes or the design of new legislation.

New laws

In this regard, and to protect the French clothing industry, new laws have been proposed including an approved bill with a mechanism to evaluate fashion companies with an eco-point system and levy €5 and up to €10 per clothing item by 2030, if a low score is achieved. The score will be displayed on clothing items to deter fast fashion consumption entirely or at least, limit it.

Of course criticism has been noted, especially with recent reports of unfair working conditions for those producing for the luxury clothing sector. Profit takes centre stage no matter the label, but the message from governments, collectively, is clear – overproduction, overconsumption and the ugly impact of fashion have to be managed through legislation.

The European Commission has promulgated an amendment to the Waste Framework Directive resulting in the EU Textile EPR Directive which requires all EU member states to introduce a mandatory and uniform EPR scheme for textiles. The collection system must be in place by January 2025.

Criticism of the directive notes that it aims to ensure profits for recycling rather than dealing with the problem, overproduction and overconsumption of clothing.

Interestingly, the OR Foundation has proposed that a portion of the EPR levies collected are provided to countries in the global South, like Ghana, with the world’s largest second-hand clothing market, Kantamanto Market, to assist with the management, recycling and disposal of the second-hand clothing exported there.

Textile waste and ‘second-hand clothing’

The directive includes a ban on the illegal export of textile waste, but misses the fact that second-hand clothing exportation is carried out legally, although reports have indicated that donating “second-hand clothing” to the global South is currently cheaper than recycling and/or disposing of the textile waste in the consuming country.

While textile waste is growing in South Africa, the issues are unique and centre around protection of the RCTFL industry against the influx of supposedly affordable clothing. It is hoped that the increase in custom duty and VAT for “small” clothing imports will level the playing fields for our local industry.

However, perhaps a novel solution for South Africa is necessary before the piles of textiles become a serious problem. Could an EPR scheme assist in the RCTFL industry?

In South Africa to date, the paper and plastic packaging, lighting and electronic and electrical goods, and now the portable battery sectors are regulated by the National Environmental Management: Waste Act, 2008 read with the Extended Producer Responsibility Regulations, 2020.

The implementation of the EPR regulations is not without difficulty and more recently, the Department of Forestry, Fisheries and Environment has started administrative proceedings for companies who have not yet registered in terms of the EPR regulations.

The existing EPR regulations apply to a broad number of parties, including those who import identified products. However, to the extent the producer of the product that is imported is not registered in South Africa, the agent or retailer is responsible for the implementation of EPR regulations.

In the case of an e-commerce platform, this is likely to provide a legal gap. Perhaps South Africa could incorporate the new legislation being developed in France with relevant localisation, that is, the requirement for international e-commerce platforms to include the EPR levy in the cost of the clothing item, which will be for the consumer’s purse.

Cooperation with e-commerce platforms may be difficult – perhaps the EPR levy could be applied in addition to the customs duty and VAT at the border?

Prices

Finally, with a focus on sustainability and the promulgation of the Climate Change Act, we can expect clothing prices in South Africa to increase in the near future with the carbon tax.

The most significant impact is the indirect impact of carbon taxes on energy and logistical costs such as electricity usage at retail outlets or distribution and warehousing facilities.

Logistics’ costs will be affected concerning transport use such as aviation and shipping. Packaging costs may also increase as glass and paper manufacturers tend to be emissions intensive. Textiles and clothing are included as an identified industry.

The increase in manufacture of textiles and clothing in South Africa is a focus of government with the 2030 RCTFL Master Plan signed by the Department of Trade, Industry and Competition, industry organisations and leading retailers.

However, the Master Plan has been criticised for its lack of focus on sustainability in the industry. The carbon tax and impending sectoral emission targets may provide a basis for manufacturing to reduce the emission of greenhouse gases in an effort to decarbonise the industry. DM

Carlyn Frittelli Davies is executive consultant, Natural Resources and Environment, at law firm ENSafrica. Mansoor Parker is executive and Busisiwe Vilakazi senior associate in the Tax Department of ENSafrica.

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New laws

Textile waste and ‘second-hand clothing’

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