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South Africa: Excise duty changes in 2024 Budget Speech

19 March 2024
– 4 Minute Read
| Tax

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Overview

  • National Treasury announced above-inflationary ‘sin tax’ increases in the 2024 Budget Speech.
  • Government aims to raise ZAR 15 billion in the 2024/ 2025 fiscal period to ‘alleviate immediate fiscal pressure and support faster debt stabilisation’, of which ZAR 800 million is expected to be generated by the increased excise duty rates.
  • While addressing the revenue deficit is key, the potential long-term impact of continued above-inflationary excise increases is a concern.

National Treasury announced above-inflationary ‘sin tax’ increases in the 2024 Budget Speech. This marks another round of significant increases in the rates of excise duty applicable to alcohol and tobacco products, well above the previous policy benchmark of Consumer Price Index (CPI)-linked annual increases.

Government aims to raise ZAR 15 billion in the 2024/ 2025 fiscal period to ‘alleviate immediate fiscal pressure and support faster debt stabilisation’, of which ZAR 800 million is expected to be generated by the increased excise duty rates.

The proposed increases range between 6.7% and 7.2% for alcoholic beverages, raising the price of a can of beer by 14 cents, while the price of wine and spirits has increased by 28 cents and ZAR 5.53, respectively. Tobacco products have been subjected to increases of up to 8.2%, despite the Finance Minister’s acknowledgement that tobacco product sales have not rebounded to pre-pandemic levels.

While addressing the revenue deficit is key, the potential long-term impact of continued above-inflationary excise increases is a concern.

Reduction in consumer demand and potential increases in illicit trade

The World Health Organisation (WHO) recommends taxation and pricing control measures as part of its Global Strategy to Reduce the Harmful Use of Alcohol, with the goal of integrating public health perspectives into taxation and pricing policy. Broadly, excise policy should promote revenue generation, and as a secondary function, assist with the management and prevention of the public health concerns around excessive consumption of alcohol and tobacco products.

An increase in the price of a product, due to a rise in taxes, usually reduces the demand for the product. The extent to which demand is reduced depends on the consumers’ price elasticity of demand. According to Samantha Filby, for alcohol and tobacco products, there is generally an inversely proportional relationship between price and recorded sales volume.1

While increased prices may compensate for decreased sales volumes to an extent, there is a real risk of consumers turning to informal and illicit means of obtaining substitute products,2 with less affluent individuals being more likely to buy illicit cigarettes.3

In the 2024 Budget, National Treasury notes that specific excise duty collections from cigarette and cigarette tobacco remain well below pre‐pandemic levels, weighing down overall collections. Treasury has also confirmed additional measures to address the illicit tobacco trade, including the controversial deployment of CCTV and related technologies at licensed tobacco manufacturers’ premises.

Following the Covid-19 pandemic and associated alcohol bans, studies suggest that the illegal alcohol market is valued at over ZAR 13 billion a year, causing an annual tax loss of ZAR 6 billion to the fiscus. Due to the tiered incidence of tax applied to alcoholic beverages, with lower alcohol content products (e.g. beer) generally being taxed at a lower rate than higher-content products (e.g. spirits), increased excise duty can effectively steer consumers towards the less harmful lower-content products and may also reduce the overall volume of consumption, particularly in less affluent communities.

However, as economically challenged households are generally more price sensitive, there is also a greater possibility of consumers substituting commercial alcohol products with home-made alcohol or illicit alcohol, that is cheaper to buy4 and more readily available through the informal economies that exist within disadvantaged communities.

The illicit trade in excisable products is a significant problem in South Africa, causing revenue loss and undermining policies aimed at protecting and promoting public health. In addition, decreased sales volumes and increased tax burdens may curtail capital investment and manufacturing outputs from the alcohol and tobacco sectors, which are key revenue drivers in South Africa. This could, in turn, have serious knock-on effects for the already vulnerable agricultural sector and other adjacent sectors, such as retail and logistics.

In conclusion, the sustainability of ongoing above-inflationary increases to excise duty rates is questionable, firstly as it may not bring in the expected tax revenues, and secondly this approach could damage long-term economic growth.

  1. Page 27 ‘Designing tobacco and alcohol taxes: International experience’ by Samantha Filby.
  2. Page 6 ‘Estimating the price elasticity of demand for cigarettes in South Africa using the Deaton approach” by Chengetai Dare, Micheal Kofi Boachie, Ernest Ngeh Tingum, S M Abdullah, and Corné van Walbeek.
  3. Page 18.
  4. Page 56 “Alcohol pricing and consumption responses in South Africa” by Kelsey Corlett.