Dark clouds gather over South Africa’s alcohol industry

South Africa’s illicit alcohol industry is growing every year, and it is estimated that one in five bottles sold are illegal. Those in the industry have called for taxes on legal alcohol to be reduced.

This includes the South African Liquor Brand Owners Association (SALBA), which has called on Finance Minister Enoch Gordonwana to reconsider the amount of excise tax charged on spirits.

SALBA CEO and General Manager Kurt Moore explained to Daily Investor that a study commissioned by the industry and conducted by Euromonitor in 2021 confirmed that the illicit industry accounts for 22% of the alcohol industry in South Africa.

“That means that at least 1 in 5 bottles in the market is potentially illicit,” Moore said. “These illicit producers evade taxes, and the study confirms that our fiscus is losing R11.3 billion in taxes.”

From a volume perspective, the 2021 report estimated that the illicit trade in alcohol had a 10% compound annual growth rate (CAGR).

Insofar as tax losses are concerned, the loss to the fiscus had increased 20% during the period.

“Reducing or keeping the increase of excise tax on alcohol in line with or below inflation will help the legal industry recoup some of its lost market share, and in so doing, we can help the government boost its excise revenue from alcohol.”

The study revealed that the illicit products can be sold 43% below the price of legal alcohol, meaning that consumers get the products for almost half the price of the legal alternative.

“Excise tax annual increases above inflation also hands the initiative to the illicit traders, and as a trade association, we are calling on government to freeze the excise tax adjustment on spirits or to keep it level with inflation.”

Although there are a few categories of illicit trade, Moore said that the two most prominent are counterfeit and illicit brands and smuggling.

Within the counterfeit and illicit category, there are two sub-categories.

First, there is substitution or refill, where illegal alcohol is sold as legitimate branded products. Often, empty bottles of legal products are refilled with cheaper illegal alcohol.

Secondly, within the broader category of counterfeit and illicit brands, there is industrial manufacturing of illicit brands, where the illegal producers manufacture on a large scale, these can be branded on unbranded alcoholic beverages.

“We also have a problem with smuggling, and this also has two sub-categories, namely the smuggling of ethanol as a raw material or finished products which enter the country and are sold illegally in our market.”

According to Moore, the illicit alcohol industry poses a number of threats to both individual consumers and the broader economy.

“Often these illicit products do not comply with the very stringent regulations governing the production of liquor products in South Africa and could pose a health risk to consumers.”

“It’s worth repeating that these producers also evade tax and cost the fiscus billions at a time where government is looking for additional revenue.”

He added that tackling illicit trade will require a co-ordinated effort between industry, law enforcement and the alcohol regulators.

“Double inflation increases in taxes for legal products forces consumers to turn to cheaper products and often these cheaper products are illicit.”

“Most South Africans would agree that we do not need to tax the compliant tax citizens more, but we should be widening the tax net to collect outstanding taxes from those who evade tax.”

Where it is discovered that someone has broken the law, Moore said that they should be punished to the full extent of the law and their licenses, if any, should be revoked.

“SALBA works very closely with law enforcement and SARS to ensure successful prosecutions of those who operate outside the law.”