While the “GNU dawn” has changed the political landscape, some parts of the old remain — including the excise tax system on alcoholic beverages, which leaves a bitter taste in the mouths of beer drinkers across the nation.
While beer is subject to a progressive tax based on its alcohol-by-volume (ABV) — the higher the alcohol content the higher the tax — this doesn’t apply to all alcohol categories. This disparity we see with beer not only defies logic but raises serious questions about fairness and equity in the tax system.
Are we to believe that the potential societal impacts of alcohol consumption vary dramatically based on whether it comes from grains or grapes? The science certainly doesn't support such a distinction. The physiological effects of ethanol don't magically change based on its source. So why does our excise tax system present otherwise? By extending the ABV-based system to all alcoholic beverages we would create a level playing field that reflects the underlying rational principles of the excise tax in the first place — to reduce the harmful consumption of alcohol and raise revenue for the government.
Let's also consider the incentives that an ABV-based excise system provides producers. Beer manufacturers face a tax system that incentivises the production of lower alcohol content beer by taxing it less. This aligns neatly with public health goals of promoting moderate consumption.
There are clear advantages in encouraging the overall evolution of the South African excise policy to an alcohol-content based excise system
On the other hand, these incentives are not found across the board in the alcohol system. Not all higher alcohol beverage producers are incentivised to produce lower alcohol beverages for consumers through the excise tax regime. In fact, they might be tempted to increase alcohol content to boost flavour intensity and perceived value, knowing it won't affect their tax burden.
Many countries have already adopted ABV-based excise systems, providing valuable benchmarks for South Africa. Within the EU the directive on alcohol taxation recommends member states tax alcohol based on ethanol content. To-date, countries such as the Netherlands and Denmark have successfully implemented this approach. In 2006, Australia reformed its alcohol taxation system to be largely based on alcoholic content, with some exceptions. This change has been credited with reducing harmful drinking patterns. New Zealand uses a pure alcohol-based excise system, simplifying administration and creating equality across different alcohol categories. In Canada several provinces have moved towards alcohol content taxation, indicating how this system can work in diverse markets.
The most recent shift to an ABV-based excise system across alcohol beverages occurred in the UK in 2022. The government said the old excise system was not based on any over-arching principles, causing the structure of duties to reflect historical preferences and past circumstances, which lacked relevance today. This gave rise to unfairness between categories because of a lack of objective design principles.
Based on this multiplicity of international benchmarks, there are clear advantages in encouraging the overall evolution of the South African excise policy to an alcohol-content based excise system. We could achieve better public health outcomes through this direct link between alcohol content and taxation and it may also be a means to improve the administration of excise taxes, reducing compliance complexity for both regulators and producers. It could also create a fairer competitive alcohol market through the removal of category-based distortions to allow products to compete on a level playing field. Additionally, there is a chance for the fiscus to maximise revenue potential from the application of the excise tax instrument.
Imagine a scenario where all beverages with the same alcohol content attract the same excise rate. This uniformity could improve market dynamics, sending consumers clear market signals that nudge them towards lower alcohol beverages, increasing the levels of moderate drinking through the excise tax they pay. Higher-strength beverages would carry a higher tax burden, reflecting their more concentrated nature. This would create an equitable excise tax framework that ensures our tax system is based on principles rather than preference.
In the spirit of our new political era, it is time for South African policymakers to embrace change and address the inequities in the current excise tax system by implementing an ABV-based system across all alcohol categories. Let's toast (responsibly of course) to fairness and consistency in our excise policy — it's an idea worth raising a glass to.
• Banda is senior manager excise tax and public policy, SAB
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