Industry organisation the Beer Association of South Africa (Basa), in submissions made on the 2022 Draft Tax Bills, strongly advocates for, at minimum, an increase in excise duties that is commensurate to the inflation rate.

The increases in excise duties, with specific reference to the beer, other tariff item in the Act, over the past six years, have been higher than the inflation rate, and this relative divergence from the inflation rate over the past six years has “undeniably had a compounding relative economic effect”.

“The impacts of the pre-2021 historic increases in excise duties remains a burning issue to the industry. In this submission, Basa wishes to impress upon the Standing Committee on Finance that the element of tax incidence cannot be detached from the relative economy; and that the historic distortion in increases may not be entirely redressed, but should not be entertained in the upcoming budgetary cycle, or as would be further argued in future budgetary cycles,” says Basa CEO Patricia Pillay in a submission to the Standing Committee on Finance of Parliament on September 14.

“In its discussion document titled, “A Review of the Taxation of Alcoholic Beverages in South Africa” in May 2014, Treasury acknowledged the need for differentiation in the alcohol sector.

“While government acknowledged the differentiation in alcoholic products and, through its Excise Policy Framework positions this differentiation through its tax consumption tax burden on wine, clear beer and spirits to be fixed at 23%, 33% and 43%, respectively. This differentiation fails to address or redress the historic bias to specific alcoholic products,” she says.

Currently, excise duties on alcohol products are divided into no less than 16 groupings with about ten different excise duty rates applied. Within each product grouping, further subdivisions exist based on factors such as packaging, feedstock material, fermentation and mixing.

“This is an onerous historic system of taxation that has only metastasised over time as new products entered the market. This high level of granularity has not only caused layers of complexity, which is a challenge for new market entrants and a barrier to product innovation, but also creates a high potential for tax avoidance through tariff classification selectivity in favour of the lowest excise duty rate.

“Examining the current and historic excise duty rates structure, it is undeniable that beer has suffered and continues to suffer significant disadvantage to other specific alcoholic products, whether based on bias or historic advantage to those products,” Pillay says.

The most glaring advantage to a specific class of products is afforded to wine. While beer is taxed at an excise duty based on the alcohol-by-volume (ABV), wine is taxed at a rate based on litres irrespective of the ABV. Therefore, irrespective of the strength of the wine, the excise duty rate remains constant per litre, she notes.

This divergence from the inflation rate of the relative year-on-year increases in excise duties has resulted in a cumulative variance of 17.03% over the past six years.

“It is clear that the relative year-on-year increases in excise duty rates over the past six years has incrementally widened the gap between the excise duty rate and the relative annual inflation rate. The burden of above-inflation increases is not on the producers, but ultimately on the consumers based on the elasticity of the industry,” she notes.

Government in 2021 recognised that “excise duties have been climbing above inflation in most recent years”. However, despite this, government keeps raising the excise duty incidence above its own policy directives from 2014, Pillay highlights.

“The government's increases in excise duty rates above the policy thresholds have a detrimental influence on tax incidence as well as investor confidence as it paints a picture of an unstable fiscal policy,” she avers.

In its submission to Treasury and South African Revenue Service (Sars), Basa impresses the need for excise tax reform and the application of a consistent approach through ABV taxation for all alcohol products.

In addition to the argument for an ABV-based excise duty structure, Basa also impresses on Treasury and Sars the inequitable current regime has adopted of varying excise duty payment terms.

The Rules to the Customs and Excise Act sets out varying payment terms for the various alcoholic products ranging from 30 days in the case of beer to 130 days in the case of spirituous beverages. Basa further proposes that the payments terms for the collection of excise duties should be uniformly applied across all alcoholic products, she adds.

“Basa, on behalf of its members, humbly requests that National Treasury give careful and due consideration to the elements of inflation-based excise duty increases, and policy commitment to a three-year inflation-based increase strategy, as these foreseeably will have a direct impact on the 2023 budget announcement,” Pillay states.

“It is without question that yet another increase in the excise duty rate on beer above the inflation rate is neither beneficial to government nor to industry, let alone the compounding effect on the consumer. In addition, the deviation by government from its own fiscal policy is counterproductive to economic recovery as it decimates investor confidence.

“A commitment by government to maintain a stable excise policy over the following five years would be complimentary to the intent by government and a clear indication to investors of government’s deliberate intent to attract foreign direct investment,” she says.