Tie booze tax to inflation, Treasury told

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The alcohol industry has urged the National Treasury to consider tethering new excise levies to consumer price inflation and incentivising the production of lower-strength alcoholic drinks in tax proposals aimed at curbing abuse.The industry met with the Treasury during a virtual stakeholder engagement on Thursday, to which Business Times was granted access. The meeting discussed proposed changes to alcohol excise duties, which could raise beer excise by 20%.Sibani Mngadi, director of corporate relations at Diageo, told Business Times after the meeting that the group welcomed the continued discussion on harmonising alcohol excise taxation based on alcohol by volume (ABV).We are encouraged by National Treasury’s acknowledgement that the spirits category is already subject to a disproportionately high tax burden, which contributes to making it the segment that is by far the most vulnerable to illicit trade.— Sibani Mngadi, director of corporate relations at Diageo“We are encouraged by National Treasury’s acknowledgement that the spirits category is already subject to a disproportionately high tax burden, which contributes to making it the segment that is by far the most vulnerable to illicit trade,” he said. “As government considers broader excise reforms across the alcohol categories, we believe there’s a strong case for freezing any further excise increases on spirits. This would help promote greater equity in the tax framework while allowing time for a comprehensive review of the system.”The duties adjustment proposals that the Treasury has been considering and consulting the industry on since November are not aimed at raising additional revenue for the fiscus but at curbing the consumption of alcohol categories that South Africans drink excessively.Currently, excise duty on a standard 750ml bottle of spirits amounts to R97.66. Any further increase would push the tax burden beyond R100 per bottle. Mngadi said that at a time when consumers were under financial pressure, this risked rapidly accelerating the shift towards illicit alcohol.“We believe the priority should be to establish an equitable, evidence-based excise framework that protects government revenue, supports fair competition and discourages the growth of the illicit alcohol market.”Mpho Legote, director of VAT, excise, subnational tax and financial sector policy at the Treasury, told the meeting that in seeking to reduce excessive drinking, the proposals also looked to change formulation methods for high-volume beverages where possible, as it was complex in wine.“From a National Treasury perspective, we use the excise duty instruments to seek to internalise social costs, but in doing that we are also looking at reducing affordability and hence consumption but also at incentivising reformulation where possible.Read: Stiffer tax on booze looms large“I think this was part of the proposals that we put with regards to the tier system, that we should look at incentivising reformulation… We have also considered some of the issues around what is possible and what is not possible in the wine industry because of the regulatory framework that applies to wine, but that does not exclude us from looking at the progressivity of the system.”Legote acknowledged that excise duty was “not a silver bullet that is going to solve all the alcohol-related harms and social costs”. He said the Treasury also proposed a “progressive excise duty rate structure” to address equity issues in the current system.David Harrison, CEO of the DG Murray Trust, said: “The anchor must be the alcohol harm curve, which is an exponential curve, and whether it’s for disease or for injury, it doubles for every 20g of alcohol consumed. So our focus, obviously, must be on the upper edge of the curve and finding ways to reduce that.”Neo Momodu, executive for legal, regulatory, and stakeholder engagement at the Consumer Goods Council, said that if the Treasury proceeded with a tiered system, consideration should be given towards maintaining simplicity, eliminating administrative complexity and ensuring duty differentials created incentives for migration towards lower-volume alcohol products.“Current category differentials were established through deliberate policy choices over many years. If significant changes are now contemplated, this should be accompanied by a carefully managed transition. Our assertion is, therefore, that the current differentials are the result of policy design, not policy failure.”Carmen van Niekerk, head of regulation and policy at Heineken Beverages, said the introduction of tax treatment through an ABV bracketing approach could create unequal outcomes. She said wine could not move to a bracketing approach on the basis of the current proposals.“Beer in the category can transition with calibrated incentives, while wine cannot, and we will continue to push the point that wine should be protected as a national asset. The UK defended traditional cider during their policy reform, and they built a set of policy principles that we believe are highly relevant to the South African wine debate.”She said the current proposals could mean a R1.5bn-a-year loss to the wine value chain. She said incentive-based bracketing was more workable for beers, ciders and other fruit-fermented beverages due to flexible product and technology pathways.A 20% once-off increase, or even if it’s phased in through several years, of above CPI (consumer price index) increases risks creating an affordability shock for legal volumes and will destabilise the extensive value chains that this category supports.— Carmen van Niekerk, head of regulation and policy at Heineken Beverages“A 20% once-off increase, or even if it’s phased in through several years, of above CPI (consumer price index) increases risks creating an affordability shock for legal volumes and will destabilise the extensive value chains that this category supports.”Van Niekerk asked that the upper end of the lowest bracket be extended to 3.5% ABV to help consumers adjust.Morgan Schondelmeier, of the World Brewing Alliance, provided an anecdote of similar excise proposals in the UK, saying tax incentives for lower-strength products were successful in enhancing public health through a meaningful tax advantage of 50% for producers of lower ABV.“The growth in this sector is a combination of people switching from higher-strength products to lower-strength products as they become more available and then also the creation of new products that are appealing to customers. So, this is quite a big change in incentives and in purchasing behaviour, which has led to more positive health outcomes.”Fatsani Banda, senior manager on excise tax and public policy at South African Breweries (SAB), said the proposals exacerbate the structural issues in the excise regime and that SAB highlighted how above-inflation increases perpetuate volatility and reduce the credibility of excise adjustment anchors.“SAB proposes that the CPI-linked adjustment framework be the status quo going forward in the excise policy. We believe that it anchors the excise adjustment to a transparent and economically grounded benchmark, that being projected inflation.“It provides the predictability and stability that the beer industry has been asking for, for the last five or six years, that allows for investment and planning. It also preserves the real value of excise revenue without undermining the tax base.”Prof Corne van Walbeek, director of the University of Cape Town’s research unit on the economics of excisable products, said there was an opportunity to engineer supply-side effects through reformulation of beverages, for beer, ciders and other fermented beverages. “Reformulation to lower-alcohol products is technically feasible and has been done in the past. “There’s a good understanding of how to do that. Taxes initially might have been levied at engineering a demand response where people consume less, but it’s also possible to engineer a supply response through an increase in the excise tax.”This applies to a lesser extent to wine and does not apply to strong liquor, Walbeek acknowledged. He said incentives could work in reducing alcohol content in some drinks in the same way that the sugar tax reduced sugar content in soft drinks.Business Times