SIBANI MNGADI: Excise tax is no means to cutting harmful alcohol consumption

The negative effects of the four alcohol sales bans over the past two years cannot be ignored, especially when preparing for excise tax adjustments in 2022. However, a call for a lower tax rate for beer versus other categories of alcohol (wine and spirits) misrepresents the current alcohol tax structure.

Excise tax for beer and spirits is applied on the absolute alcohol component of the product — what is otherwise declared as alcohol by volume (ABV). To argue that beer should be further discounted misrepresents the already segmented rates applied to fermented versus distilled product. 

Different rates are applied depending on whether the product is a beer product (fermented) or a spirit (distilled). Currently, beer pays R115 per litre of absolute alcohol (LAA) while spirits pay double the amount at R230 for the same litre of absolute alcohol.

Using these rates, a 750ml bottle of beer with 5% ABV will pay R4.31, while the same 750ml bottle of vodka-based spirit cooler at 5% ABV (for example, Smirnoff Spin) will pay R8.62. The most commonly sold 750ml bottle of spirits at 43% ABV pays excise tax of R74.22c.

The drivers of this beer argument state that further reduction in tax for beer may contribute to reducing alcohol-related harm as more people will consume lower ABV products. Beer already dominates the SA alcohol market at 74% of total volume.

Again, let us compare apples with apples using the pure alcohol contribution of beer versus spirits. According to the International Wines and Spirits Record (IWSR), the leading source of global alcohol data, beer makes up 53% of pure alcohol in the SA market. Spirits (combined with spirit coolers) make up 26%.

Using tax interventions to shift consumption to beer will only serve to increase beer’s contribution to total pure alcohol consumed and no effect on harmful consumption can be expected.

While it may compensate for externalities, excise tax is not a measure to reduce harmful consumption. Excise tax applies a blanket price pressure on all consumers, irrespective of whether they consume alcohol responsibly. The primary effect of this is that lower-income groups trade down to cheaper brands or are more inclined towards the illicit market, in other words non-tax paying products.

Smuggling and production of counterfeit products grew exponentially to R20bn (12% share of total alcohol market) due to the four lockdown bans of alcohol sales. According to Euromonitor, spirits account for almost half (48%) of this illegal market, followed by sugar fermented ales (22%). SA’s government has had to act against several diplomats for abusing their privilege to purchase alcohol tax free, and feeding the illegal market.

Targeted interventions aimed at addressing social drivers of harmful use of alcohol — from education and awareness, law enforcement to health treatment interventions — are what will the resolve the problem of alcohol abuse.

From an excise tax revenue contribution perspective, the IWSR reports that spirits contribute 32% of excise tax revenue, which is higher that its 26% share of pure alcohol, and beer contributes 53% (versus a 53% pure alcohol share). Therefore, a reduction in spirits volumes will have a greater negative effect in the overall revenue collection from alcohol excise tax than the reduction in beer volume.

The latest call from advocates of preferential tax treatment for beer has been for the finance minister to consider reducing excise tax for craft beers because these products are produced by small to medium size enterprises (SMMEs). If practical, that call should have been extended to small wine and spirits producers as well.

Unfortunately, the proposal is not practical because excise tax is applied on a product itself, and not on the income statement of a company that produces it. The size of a company, whether it is a small supplier of beer, spirits or wine, becomes relevant in a corporate tax setting, which evaluates profits and losses of a business entity.

Lockdown sales bans have negatively affected all SMMEs in the alcohol value chain, from small ingredient suppliers, and packaging and logistics companies, to taverns, restaurants and retailers that ultimately sell beer, spirits and wine to consumers. No business has been spared the economic hardship of the lockdown.

The rational way forward would be a moderate excise tax adjustment that is not higher than inflation across all three categories — beer, spirits and wine. This is what the industry should be striving for in finance minister's 2022 budget statement. This would provide across-the-board tax relief that would stimulate the growth of the alcohol industry and help it continue to make a significant contribution to the overall economy of the country.

• Mngadi is corporate relations director at Diageo SA.