Over-taxing spirits fuels illicit trade, deepens budget woes

AS South Africa braces for the rescheduled Budget Speech on March 12, the SA Liquor Brandowners’ Association (Salba) has issued a stark warning: excessive taxation on the legal spirits sector is not only driving consumers into the arms of illicit traders but also exacerbating the country’s budget shortfall.

Salba this week urged Finance Minister Enoch Godongwana and the National Treasury to freeze excise tax adjustments on spirits or—at the very least—peg them to the current inflation rate of 3.2%, as announced by Statistics SA for January 2025.

This comes amid reports of a proposed 6.83% hike in spirits excise tax—more than double the inflation rate.

Kurt Moore, the chief executive of Salba, minced no words: “If the reports of a 6.83% increase on spirits in excise are accurate, that would represent an increase that is more than double the January inflation rate. Such drastic increases will give more control to illicit traders, potentially resulting in the legal trade paying less taxes and, alarmingly, deepening the risks to the safety and health of consumers.”

The illicit alcohol trade, which thrives on tax evasion, sells liquor at prices 43% cheaper than legal products. This shadow economy robs the government of a staggering R11.3 billion annually while exposing consumers to unregulated, potentially hazardous products.

Moore argued that by cracking down on illicit traders and adopting a more reasonable approach to excise tax increases, the government could recover a significant portion of this lost revenue—roughly one-sixth of the R60bn expected from the proposed VAT increase.

“This will provide a fair chance to the regulated alcohol value chain to recover some of the market share it has lost since the pandemic. Spirits are taking strain under the combined weight of excise policy and illicit trade. Spirits volumes fell by 13% in 2023, a marginal improvement on the 16% decline experienced during the Covid-19 period. This directly translates to revenue loss for the government," Moore said.

The legal alcohol sector remains a vital contributor to South Africa’s economy, generating an estimated R96.9bn in tax revenue—6.7% of total government income. The industry supports nearly 500 000 jobs and sustains the livelihoods of 1.15 million South Africans. However, Moore warned that relentless above-inflation excise tax hikes were undermining this economic engine.

“Our stance is that a series of excise tax increases above inflation has already aided and abetted illicit operators who evade paying taxes and put consumers at risk with products that do not necessarily comply with the stringent regulations governing the production of liquor products in South Africa,” he said.

A 2023 study by Professor Graham Barr of the University of Cape Town’s Department of Statistical Services underscores the industry’s net-positive impact. Published in the 2024 South African Journal of Economic and Management Sciences, the peer-reviewed research found that the alcohol industry contributes R62.01bn annually to South African society—at 2019 prices. Barr’s findings suggested that this net contribution should inform government policy, particularly in addressing the illicit trade.

Spirits, taxed higher than other alcoholic beverages due to their alcohol-by-volume content, are particularly vulnerable to illicit competition. Illicit products, sold at 43% below legal prices, incentivise consumers to bypass regulated channels, further entrenching the underground market.

Moore welcomed the National Treasury’s recent acknowledgement that “the problem of the illicit economy or trade is a serious global issue requiring greater and concerted attention to curb both supply and demand”. However, he stressed that words must be matched with action.

“On 12 March, there is an opportunity to tangibly address these interrelated challenges—let’s take it,” Moore said.

As the countdown to the Budget Speech begins, the question remains: will the government heed the call to strike a balance between fiscal responsibility and the sustainability of a critical industry, or will over-taxation continue to fuel a crisis that benefits no one but illicit traders?