An economic assessment of menstrual hygiene ProductTax cuts
Creators: name: Rossouw, Laura
name: Ross, Hana
name: , Bill
Publisher: name: Gates Open Research
Year: 2020

description: Access to menstrual hygiene (MH) products is key to safe menstrual hygiene management (MHM) that promotes dignity and health for women and girls all over the world. MHM has implications for labor market functioning, schooling outcomes, social well-being, and ultimately the economy. The social and economic barriers faced by women and girls have inspired an effort to reduce or remove taxes on MH products to increase affordability, expand the number of women and girls who have access to them, and ultimately advance gender equity. Numerous countries in Europe, Africa and elsewhere have already removed MH product taxes and/or organized free distribution of MH products to vulnerable population.<br> <br>This study was funded by the Bill &amp; Melinda Gates Foundation and focuses on the role that removing or reducing value-added taxes (VAT) and/or general sales tax (GST) may play in improving MH product affordability and access, with a focus on countries in Sub-Saharan Africa and South Asia.<br> <br>Research summary and components<br> <br>This report evaluates the economic impact of MH product tax cuts with a focus on the implications for affordability, equity of access and use, and government revenue. In analyzing the political economy of the MH product markets, we point to potential threats and opportunities for MHM campaigns. Those include collaboration with MHM industry with close monitoring to ensure fair market competition and adherence to product standards set by governments.<br> <br>We primarily draw on information from four countries (Bangladesh, Kenya, Nigeria and South Africa) that experienced MH product tax cuts and substantiate it with data from other countries in order to determine patterns and make global comparisons. Additionally, we built an economic toolkit that can be used by advocacy groups and policy makers to evaluate the economic aspects of decision-making around menstrual hygiene products and model potential outcomes.<br> <br>The four focus countries were selected considering their varying approaches to MH product tax cuts. <b>Bangladesh</b> removed VAT on raw materials for production of MH products from July 2019 until June 2021 to stimulate local production. So far, only one local company with market dominance qualifies for this temporary tax cut. VAT on both domestic and imported products is still charged, and imported products are levied a supplementary import tax. <b>Kenya </b>has some of the most far reaching MH product tax cut policies in the world. It removed VAT on sanitary pads and tampons as early as 2004, import tax on final products in 2011, and VAT and excise tax on imported raw material for production of MH products in 2016. As of February 2020, <b>Nigeria</b> exempts locally manufactured MH products from VAT, but it still charges VAT on imported products and on raw materials. <b>South Africa</b> removed VAT on sanitary pads in April 2019, but VAT on tampons are still in place. <br>Our research concludes that<b> removing</b><b> VAT/GST alone will not sufficiently improve the affordability of MH products in order to increase use. Even if all VAT/GST tax cuts were passed on to consumers, the impact on price would be relatively small. </b>There are many political and economic barriers, including complex tax systems and corporate interests, preventing the tax cut from translating into lower prices. Additional measures such as free distribution or targeted subsidies are needed to improve affordability, as well as secure equal access and use of products. MH product tax relief can be seen as a part of a fiscal package to increase access to households who are poor. In addition, MH product tax relief campaigns in the four focus countries have shown great value in raising awareness on gender justice and reducing stigma associated with menstruation and MHM policy. This evidence is captured in a companion report by Global Health Visions.<br> <br>Key findings<br> <br>1.MH products are significantly less affordable in low- and middle-income countries (LMICs) than in high-income countries (HICs)<br> <br>Globally, there has been a move towards removing VAT/GST on MH products with the intention to increase their use by making them more affordable, especially in LMICs. Our <i>MH products affordability index, </i>a tool built for this report to compare affordability of sanitary pads (note that use of other MH products is negligible in LMICs) across countries and over time, confirms these products are more than twice less affordable in LMICs than HICs. To the best of our knowledge, this is the most extensive and systematically comparable tool of its kind. The index reflects both prices of MH products and average income and provides a rationale for policies aiming to reduce MH product prices in LMICs.<br> <br>2.VAT/GST removal in LMICs is insufficient to increase affordability of MH products<br> <br>Kenya, a country that successfully removed all applicable taxes has the least affordable sanitary pads among our four focus countries. Even though the affordability of sanitary pads in South Africa is comparable to many HICs, this picture is distorted by high levels of inequality not captured by the index.<br> <br>There is scope to use fiscal policies to increase affordability of MH products in LMICs. Since tax removals are not sufficient in improving affordability of MH products, the governments are using other measures such as providing for free distribution or by subsidizing the products. All focus countries have an allocation for free distribution with a limited scope, primarily via schools and family planning centers. However, budgetary and logistical challenges limit the reach of these policies.<br> <br>Over time, sanitary pads became more affordable in the majority of LMICs due to both real prices declining and income increasing, but the changes are small. For example, between 2013 and 2018, sanitary pads became 10% more affordable in Kenya due to a price decline, but this translates to only about 1.7% annual increase in affordability. In Bangladesh, the average annual increase in affordability of sanitary pads reached only 1.3% during 2013 - 2018. Even though the price decline in Bangladesh is attributed to the country’s effort to promote local manufacturing of MH products, the government support of a local monopoly resulted in imposing a supplementary duty on imported MH products, which undermines market competition and likely contributes to higher average prices.<br> <br>3.A change in retail price is more dependent on market competition and local production rather than the tax scheme<br> <br>Tax removal does not necessarily lead to lower retail prices. Rather, the link between tax removal and price change is complicated due to private sector power to dictate the price.<br> <br>Some governments made attempts to regulate the retail prices of MH products by providing targeted subsidies, setting price caps, and by negotiating with manufacturers. Generally, prices of locally produced disposable MH products are about 30 to 80% cheaper compared to brand-name products, while the annual cost for reusables is only about 20% of disposables. Based on information from Bangladesh, wholesale and retail margins vary between 2% - 3% and 15% - 20%, respectively, with higher margins on more expensive products.<br> <br>To study the issue of price forming, we created a <i>market concentration index</i> to assess market competitiveness for MH products. We found that the market in South Africa is relatively competitive while the markets in Kenya and Bangladesh are not, with only one company claiming a large market share. Connecting this result to the affordability index, <b>one can preliminary conclude that lack of competitiveness in the MH product market may results in higher prices and lower affordability. The lack of competition allows MH product manufacturers and retailers to absorb tax cuts into their profit margin.</b><br> <br> <br>4.VAT/GST systems are complex, and removal does not necessarily result in a retail price reduction<br> <br>The complexity of tax systems presents an obstacle to a meaningful impact of a tax removal on price even if the tax cut is fully passed on to consumers. Apart from VAT/GST tax (completely removed in Kenya, removed on sanitary pads in South Africa and on domestically produced MH products in Nigeria), there are also taxes on raw material (removed in Bangladesh, Kenya) and corporate income taxes (temporarily lowered in Tanzania), which can boost local production of MH products, and subsequently lower their prices.<br> <br>Removing just one tax or removing the incorrect tax may not achieve the desired goal of lower prices and may even bring unintended consequences such as giving competitive advantage to certain providers as was the case in Bangladesh. There is also a difference between exemption from paying VAT/GST (e.g. India and Nigeria) and setting its rate to zero (e.g. Kenya and South Africa). Products exempt from tax cannot claim back any input tax and tax amounts may be passed on to the consumers. On the other hand, products with zero-rated VAT/GST can get refunds on any VAT paid on inputs making the final product truly VAT/GST free.<br> <br>When the advocacy effort is non-specific as to which tax is targeted, it creates ambiguity for policy makers, other key stakeholders, and opens the space for commercial interests as witnessed in Bangladesh. In Kenya, for example, taxes on MH products were removed in three waves requiring three different legislations, yet products remain unaffordable.<br> <br><b>Rigorous evidence about the link between tax changes and changes in retail prices from LMICs is entirely missing</b>, even from Kenya where the first tax was removed as early as 2004. There is some anecdotal evidence of prices decreasing after the tax removal in South Africa and in Kenya, and in Bangladesh due to promotion of local production. It is not clear if these price changes increased access or use.<br> <br>5.Removing VAT/GST is simply not enough to stimulate use of MH products<br> <br>The impact of VAT/GST removals on prices and on MH product use is not well documented due to lack of follow up research in LMICs. To fill in this gap, we built a tax simulation model that can assess the impact of VAT/GST tax removal on price, consumption and foregone tax revenue. The <i>tax </i><i>simulation model</i> is also designed to assess the impact of a tax removal on the poor relative to the more affluent touching upon the issue of equity. Based on an extensive literature review, this is the first modelling tool of its kind for MH products.<br> <br>Assuming that the recent tax changes in South Africa and Nigeria are fully passed on to consumers, the model predicts that these policies will lead to a very small price decline, and therefore a negligible increase in affordability, consumption, and impact on lower income households (equity). The model demonstrates that the cost-benefit of a tax removal, measured by comparing the tax savings for the poor with the tax revenue loss, is not enough to justify a tax removal.<br> <br>Given the paucity of data and the lack of adequate feedback from tax officials and private sector due to COVID-19 travel restrictions during the research period, the results of our model are preliminary. However, the model is ready to be populated with data and easily customized for local specific context. Additionally, it should be noted that choice of product is not necessarily preference, but rather a matter of access (a combination of affordability, geographical accessibility and acceptability).<br> <br>6.Wealth, education and urban residence are the most important determinants of MH product use in LMIC<br> <br>The analysis shows that socio-economic status (wealth, education and urban residence) are strong determinants of MH product use, with women from higher wealth groups, more education and those living in urban areas more likely to use either sanitary pads or tampons. Specific factors differ by country. In Kenya, there is similar usage of pads across wealth quintiles, whereas in Bangladesh, there are stark differences in usage, with pad consumption concentrated among the wealthiest. Overall, there is still large cohort of women using cloth as a MH product, which poses several health and practicality threats to women who must rely on this. These factors are important to consider when shaping and motivating national fiscal policies in order to correctly target vulnerable populations.<br> <br>7.Poor access among vulnerable populations may have created a market for dangerous counterfeit products<br> <br>In some countries, women are enticed to buy cheaper counterfeit products, which tend of be low quality and can have negative health impacts on women. These products can contain herbicides and pesticides, that have been reported to result in skin irritations and potentially even reproductive health issues or sepsis. Companies operating in LMICs might be tempted to offer lower-priced, lower quality products in order to increase their market, and their profit. This can have negative health implications as evidenced recently in Kenya, with the #myAlwaysexperience campaign.<br> <br>Recommendations<br> <br>While each of the selected four countries had quite distinct experiences, we identified a list of common recommendations to improve the affordability of MH products:<br> <b>Systematically evaluate the impact of tax removals and other MHM policies on prices, affordability, MH product use, MH product quality, and equity. This can be done by collecting data before and after the implementation of a new policy. </b>Such evaluations are completely missing in LMICs, and only sparse in HICs. Routine household surveys should include a set of MHM questions and MH product prices should be monitored regularly by including them into the basket of goods monitored for the Consumer Price Index (CPI). The availability of both price and consumption data will inform essential economic research on price responsiveness among different income groups. This data is currently severely lacking, impeding conclusions on price elasticity, which is a core component of fiscal policy proposals and advocacy activities. Collecting price data over time is crucial in measuring price responsiveness. In addition, data on products’ quality and presence of counterfeit/illicit products need to be collected to monitor unintended consequences of any tax change. See Appendix IV for a recommended list of questions for household level survey. In Appendix IX, we have also started compiling data points from media sources on the prices of MH products in the focus countries and other LMICs. One potential use for this is to create a centralized platform where activists and researchers can input and provide data on MH price points. <b>Promote</b> <b>local</b> <b>manufacturing</b> <b>of MH products and incentivize competition. </b>Prices of locally manufactured MH products and prices in competitive markets are lower and thus more affordable. Local production and increased competition may be encouraged through the removal of taxes on raw material used for production, preferential corporate tax rates, or access to financial resources and loans. It is important to be aware of corporate interests during the tax removal negotiations so that market competition is not jeopardized, and the quality of products available in a market is not compromised. <b>Increasing MH product affordability requires a complex tax policy proposal that goes beyond removing VAT/GST. Proposals should be explicit in which taxes are being targeted, the rationale for that approach, </b><b>and </b><b>ideally</b> <b>provide</b> <b>cost-benefit</b> <b>analysis</b> <b>of the proposed policy incorporating national data. </b>Furthermore, advocacy efforts should continue after the policy change to ensure that the tax removals or reductions have their intended impact. We include a tool which tax advocacy groups would be able to use in opposing counterarguments against MH product tax cuts (Appendix I). <b>In addition to tax cuts, policymakers should consider measures such as targeted</b> <b>subsidies to women and girls to support free or affordable distribution of MH products. </b>Offering targeted subsidies (e.g. in the form of discount vouchers) and engaging private companies via their social corporate responsibility programmes to donate free MH products with no compromise on their quality would further increase access to MH products. This free provision of MH products is essential to promoting the dignity and health for women and girls, which is an important outcome. It is important to note that the empirical evidence linking MHM to schooling outcomes and labor market outcomes has been mixed. Therefore, using this argument as basis for free provision has the potential to slow down efforts of promoting MHM as it may not result in the promoted outcomes.