Review of wiping rags rebate

02 Feb 2024

The International Trade Administration Commission of South Africa (the “Commission” or “ITAC”) received a policy directive (the “Directive”) from the Minister of Trade, Industry and Competition (the “Minister”) on 04 August 2021, to review, amongst others, rebate item 311.18/63.09/01.04 as part of the implementation of the Retail-Clothing, Textile, Footwear, Leather (“R-CTFL”) Masterplan, where one of the Four Key Action Points under Commitment 4 of this Masterplan, is to review the rebate provisions with regard to the importation of second-hand clothing. The Directive was also based on concerns which were raised by the Intergovernmental Illicit Economy Trade Task Team, about the potential abuse and/or misuse of the aforementioned rebate item, its contribution to illicit trade and the detrimental and negative effect this may have on the domestic clothing and textile industry and the fact that this rebate provision has not been reviewed for an extended period of time.

During its deliberations and in arriving at its recommendation, the Commission considered the information at its disposal, including comments received during the investigation period as well as oral representations.

The Commission found that:
a) Despite many attempts by ITAC, the South African Revenue Service (“SARS”) and industry to design better conditions and safeguards for this rebate over the years, and efforts by ITAC and SARS to monitor this rebate item, it continues to be abused and mis-used by some firms. However, there are legitimate importers who are running bona fide businesses and are compliant with regulations and rebate permit conditions.

b) From an industrial policy point of view, the risk is that second hand clothing (and perhaps even new clothing) finds its way into the South African market, using this rebate item, which has a detrimental effect on the local CTFL manufacturing and retail sectors. Furthermore, illegal imports of second hand and worn clothing also threaten to undermine the objectives of the R-CTFL Masterplan and the nearly 70 000 new manufacturing jobs which the plan seeks to create. Such illegal imports put massive pressure on manufacturers and jobs by distorting prices to levels against which legitimate manufacturers cannot compete.

c) From an administrative point of view, the subject rebate item creates an administrative burden for SARS and ITAC as the goods are imported in compressed bales, making it very difficult to verify what type of products are actually imported. For instance, the outer part of the bales may contain appropriate worn clothing suitable for manufacturing wiping rags but other impermissible clothing is hidden in the middle. Even if the illicit goods are detained or seized by Customs, the only inevitable result is storage costs. Should the rebate item be maintained, SARS proposes additional control measures such as having importers code printed on outer bales on all sides, that garments must be de-faced prior to baling, that collars, buttons and accessories must be removed and garment cut in half, etc.

d) Second hand/used clothing can be sourced within the Republic. The dtic has a number of projects currently under way to support the circular economy and avoid confiscated or seized clothing being dumped in landfill sites but to rather use it in the economy as raw material for manufacturers of various products such as wiping rags, cleaning cloths, insolation, stuffing, animal blankets, etc. Therefore, alternative arrangements should be made for those bona fide manufacturers of wiping rags and cleaning cloths to make use of local waste material that is suitable for their needs.

The Commission concluded that the facts submitted support a strong case that the rebate provision concerned requires termination in the very near future and not over an extended period. A two-year phase out period for rebate item 311.18/63.09/01.04 to the Customs and Excise Act, 1964 (Act No. 91 of 1964) is deemed reasonable.

In light of the foregoing, the Commission recommended the following:
a) Maintain rebate item 311.18/63.09/01.04 (“wiping rags rebate”) and phase it out over the next 2 years to allow the industry to re-purpose their operations over this period of time to avoid immediate job losses.
b) A 2-year phase-out period for the rebate item be effective from the date of implementation by SARS through a publication in the Government Gazette.
c) The proposed amended guidelines, rules and conditions for rebate item 311.18/63.09/01.04, which would be applicable during the phasing out period will be confirmed through a publication in the Government Gazette.

The SARS Implementation was published in the Government Gazette number 50045 on 26 January 2024.

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Report 694