A rational, consensus approach to excise tax to support national economic growth

Media Release

• Increasing the excise tax does not decrease consumption
• Excise tax has served as a catalyst for the burgeoning illicit trade market
• Illegal traders erode the net positive contribution of the legal market

The South African Liquor Brandowners Association (SALBA) agrees wholeheartedly with President Cyril Ramaphosa’s call that the nation needs to be “working together to revitalise our economy”. As the President went on to say, during his State of the Nation address on Thursday, 10 February, what is needed is “a new consensus which recognises that the state must create an environment in which the private sector can invest and unleash the dynamism of the economy”.

SALBA CEO Kurt Moore said the alcohol industry fully supported this sentiment. “Our sector is committed to playing a significant role in the nation’s economic recovery. We employ almost one million people across our value chain, generates critical export sales and makes a significant contribution to GDP ‒ the alcohol industry pays SA Revenue Services an average of R2.5 billion per month in excise tax contributions. The alcohol industry contributes R72 billion to the Government’s fiscus by way of taxation, VAT, and excise and in 2019, the alcohol sector contributed 3.4% (R173 billion) of South Africa’s nominal GDP. The impact of COVID-19 and subsequent measures taken to deal with the pandemic had a devastating impact on their livelihoods. Unfortunately, we estimate that it will take four years for the industry to get back to operational levels of 2019.”

The government’s challenge to fulfil its economic recovery plan requires a massive infrastructure rollout and an employment stimulus to create jobs and support livelihoods. This places an enormous burden on the nation’s fiscus. However, you cannot simply tax the country into economic growth.
Moore said the industry is a significant contributor to the fiscus through the number of people it employs who pay tax to the proceeds paid to the government from excise taxes. In addition, it believes that private business ‒ from corporate through to small to medium enterprises (SMEs) ‒ has a vital role in alleviating poverty through job creation and encouraging business expansion.

The industry, therefore, strongly contests the knee-jerk reaction that the government should increase excise rates to fund the economic recovery. Hand-in-hand with such thinking was the misguided notion that exorbitant excise taxes are a useful tool to lower alcohol consumption. This belief is driven by the government’s laudable commitment to reducing the irresponsible consumption of alcohol that negatively impacts the nation’s health. However, the excise tax is neither a rational solution to reduce harmful consumption nor a measure that would benefit the fiscus.
The industry has continually stated – and strongly advocated – that what is required to resolve the problem of alcohol abuse are targeted interventions to address social drivers of harmful use of alcohol – from education and awareness to law enforcement and health treatment interventions.

However, what the excessive excise taxation – which has quadrupled since 2000 – has done is to serve as a lever for growth in the illicit alcohol market where illicit alcohol is now around 43% cheaper than legal alcohol on average. According to a Euromonitor report, the excise tax increases have not impacted alcohol per capita consumption, which has remained static over the same period. The report also states
that the illicit alcohol market has doubled over the last ten years and now constitutes around 22% of the total market.

The current trend of excise rate growth far outstrips inflation levels. Our view is that the excise tax should better align with inflation – and not be used as a tool to lower consumption. The concern is that excessive excise tax increases disadvantage the legal market – not the illicit – and consequently shrinks the tax benefits gleaned from that legal market.
We all know that the pandemic has placed burdensome economic restraints on our people. The consumers’ quest for cheaper alternatives – i.e., the illicit market – can only increase in such times. And while legal producers continue to face significant cost pressures, the illegal traders will exploit this competitive advantage, eroding the net positive contribution of the legal market.

“The industry remains committed to playing a significant role in the nation’s economic recovery,” He reiterated. “We propose moderate excise tax adjustment that is not higher than inflation. This across the board tax relief is necessary if the alcohol industry is to play a significant part in the country’s economic recovery, create jobs, encourage the growth of SMEs, attract foreign investment, and contribute to the fiscus.”
Moore said SALBA had approached the Treasury on these matters.