MAP InsightsColumn in BUSINESSWORLD
Tax Incentives for Sustainable and Ethical Fashionwritten by Mr. RAYMOND “MON” A. ABREA - March 21, 2023
The fashion industry is notorious for its adverse impact not only on the environment, but also on human rights and animal welfare. Studies show that the fashion industry contributed at least four percent of the global greenhouse gas emissions, while others peg the figures as high as ten percent. On human rights, studies also note that the fashion industry was “plagued by poor wages and excessive overtime to fatally unsafe conditions, child labor and modern slavery.” Animals are not spared either, as the animals used in the textile industry are usually subject to inadequate living conditions, painful mutilations, long-term mental stress, poor breeding choices, and more.
These adverse impacts can be stopped if only these businesses adopt more sustainable initiatives. The problem, however, is becoming sustainable comes with several costs.
Costs of Sustainability
The first step in arriving at a strategic investment package is to identify the several costs involved in the production and selling of a fashion brand. There are concepts that are common to all businesses, such as direct costs and indirect costs, but there are certain concepts that have a certain meaning when discussing sustainability. For example, the concept of return on investment (ROI) when talking sustainability means the additional profit that a company would generate from going green over the total investment and expenses which they will incur in making their products more sustainable and ethical.
Another example would be an opportunity cost which, in this particular context, would mean the foregone benefits or revenues in choosing to invest in sustainability as opposed to not doing so. This may include the cost of investment that would have been used to produce more products, the additional costs or expenses that would have been part of the profit margin, and in case it would result in an increase in selling price, the lost revenue from customers who opted to buy cheaper brands or stocks.
Given the cost consideration that a business in the fashion industry incurs, one can arrive at a more strategic option to address the issue of sustainability. The goal here would be to show that the incremental benefits of discontinuing these unethical practices (e.g., labor exploitation, animal cruelty, etc.) far outweigh the benefits of choosing the status quo.
Why Should the Fashion Industry Be Sustainable?
The main, altruistic reason would be that becoming more sustainable would address climate change as a whole. Presently, the goal of the international community is to lower global warming to no more than 1.5 degrees Celsius, and the fashion industry must play its part to achieve that goal as well. Studies have shown that failing to achieve that target would lead to long-lasting and irreversible effects, such as the loss of some ecosystems.
The same reasoning could be extended to why the fashion industry should end its human and animal rights violations.
Of course, even outside the common goal of addressing global warming, businesses in the fashion industry will have to face financial or fiscal constraints for embracing sustainable change.
For one, it is more expensive to stay “not sustainable” as countries have begun to implement carbon taxes, which hurt businesses that do not go green. A carbon tax is essentially a tax paid by businesses for each ton of greenhouse gas emissions they emit.
Another reason for adopting sustainability initiatives is consumer behavior. Studies show that millennials and Gen-Z consumers are willing to spend more on products that would be less harmful to the environment. Likewise, people are more likely to choose fashion brands that prioritize animal welfare or animal protection.
Creating the Investment Package
As is clear from the foregoing discussion, there are benefits and drawbacks for becoming more sustainable, at least on the part of businesses with a view on their profitability. The goal, then, is to tilt the balance more in favor of sustainability. To achieve this, one solution is to create an investment package for the fashion industry – a combination of fiscal and non-fiscal incentives that would encourage luxury and non-luxury brands across the world to be more responsible and sustainable. This can also extend to their celebrity ambassadors or influencers, and their consumers.
For fiscal incentives, the incentive package could include a Green or Sustainable Tax (GST) Refund, a Tax Relief for Non-Luxury Brands, and Tax Holidays for a certain period. These fiscal incentives are straightforward in that they reduce the taxes that businesses or consumers who go green would have to pay.
The GST Refund could be a benefit offered to consumers of sustainable products. By purchasing from sustainable and ethical fashion brands, consumers could be given a tax refund of a certain amount.
Another fiscal incentive is the grant of tax reliefs to non-luxury brands and smaller businesses. The costs of going green would be more impactful to smaller businesses as they may not have the resources to shoulder these expenses. This incentive solves that problem by allowing companies under a certain threshold of income to be exempted from tax.
For bigger businesses, a tax holiday could be granted for a certain period during their transition to becoming more sustainable. It is hoped that this measure would be sufficient to entice bigger fashion brands to prioritize making their products more sustainable so that they would be able to avail of the tax holiday.
The investment package could also include non-fiscal incentives which would involve direct infusions into these businesses. Examples include financial grants or loans, technical assistance, green pass or lane, research and development support, health programs for laborers, and awards and recognitions, especially for celebrity ambassadors and influencers, among others.
Overall, instead of putting the burden on governments to enforce sustainability initiatives, this investment package seeks to give the choice to the businesses themselves, and the consumers as well. The pros and cons of going green is an essential consideration for businesses but, more importantly, for the global community as it is the planet that we live on that is at stake.
(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a MPA/Mason Fellow at Harvard Kennedy School. He is a member of MAP Tax Committee and MAP Ease of Doing Business Committee, Co-chair of Paying Taxes on Ease of Doing Business Task Force, and Chief Tax Advisor of Asian Consulting Group. Feedback at <email@example.com> and <firstname.lastname@example.org>.)