FATSANI BANDA: It’s not possible to tax the country into growth

The theme for this year’s Tax Indaba was “Surviving taxation in a no growth environment” and follows on from the recent South African Breweries (SAB) State of the Beer Economy event, where a similar theme emerged during the panel discussions. 

Data presented by the Bureau for Economic Research (BER) painted a dire macroeconomic picture that showed the strain the South African consumer was under due to high inflation and rising interest rates.

These factors informed a longer-term trend that reflected increasing consumer sensitivities to beer industry price hikes in particular. The BER research confirmed what we had already seen over the past year, namely that the alcohol industry is facing unprecedented strain arising from demand-side pressures. In other words, cash-strapped consumers are prioritising spending on the basics as their disposable incomes shrink. This has had an impact on our operating performance.

Add to this tough operating environment the persistently uncertain excise tax environment, and you have a beer industry that’s under pressure. The main problem with the excise tax system as it now stands is that it is unpredictable and volatile. It is certainly not known for consistency, with seemingly arbitrary increases that, more often than not, have tended to trend higher than projected inflation, instead of in line with it.

The long-term trend has shown that between 2010 and 2020, the average nominal excise rate for beer was three percentage points higher than the average annual inflation rate. The silver lining has been that the last two national budgets have shown that it is possible to get excise tax certainty, given that excise taxes were on average adjusted in line with projected inflation.

Above-inflation excise adjustments, which are out of line with the government’s own policy, have and continue to be disruptive to business planning. We have yet to experience a sustained trend in which the excise adjustment is applied in accordance with the state’s actual excise policy governing it, which is that any increases should be in line with consumer price inflation. It seems it has been forgotten that certainty provides industries such as ours with a clear basis on which to plan and make investment decisions into the medium term. Indeed, variances in planned excise adjustments vs actual excise adjustments negatively affect the efficiency of our planning systems.

The government is facing its own tax conundrum as it looks to find a solution for the undercollection of revenue vis-à-vis budget estimates tabled earlier this year by the minister of finance. Economic growth remains muted, directly affecting the health of the fiscus. Rather than treat the disease, the quick fix at least for the next annual budget is to treat the symptoms. This is being done by attempting to raise the required revenue to cover (most) of the government’s planned expenditure, while prioritising the stabilisation of debt.

To its credit, since the 2020 budget, the government has avoided increases in tax rates. There has been an acknowledgment of the fact that tax increases are often put forward as the natural response to cover expected revenue shortfalls, but in a highly unpredictable or low growth economic environment, such increases carry significant risks. The commodity cycle boom and the additional receipts coming in from the mining sector have for the most part obviated the need for the use of tax instruments to sustain South Africa’s fiscal position. This period of elevated commodity prices has led to revenue surpluses over the past two years, but the gains are now beginning to dissipate, and this has shown itself in the declines in revenue collection.

So, while we know that addressing supply-side issues such as load-shedding will play its role in driving opportunities for increased economic growth, the question still remains how to navigate taxation in this low growth economic environment. However, we also believe that it is not possible to tax the country into growth. Rather, there needs to be an improvement in the effective yield on existing tax instruments. Our economic situation, where price stability remains a concern, has affected the economic performance of the beer industry.

Sure, there may be no rainbow in sight at the moment, with the storm still raging based on stresses facing consumers and the national fiscus, but if we allow pragmatism to prevail, it will help sustain an industry that is one of the country’s biggest taxpayers.

In the grand scheme of things, it costs the government and the fiscus very little to grant the beer industry the tax certainty it is asking for. To implement more than the stipulated excise tax increase that has been outlined in the excise policy would exacerbate the effects of a tough macroeconomic environment on the beer industry, putting unnecessary hurdles in our path.

The industry creates one in 66 jobs, and makes a R71bn contribution to GDP, so excise tax certainty becomes an important lever for ensuring that we continue to accelerate growth not only for the beer industry, but for the country as a whole.

* Banda is senior manager of excise tax and public policy at SAB