Amid continued tension in the Government of National Unity (GNU) over February’s postponed budget speech, British alcoholic beverage company Diageo warns against the possible consequences of an increase in “sin tax” on beer and spirits.
The holding company of brands like Guinness, Johnnie Walker and Smirnoff, said: “The clear intention of Treasury to impose an above-inflation excise tax increase of 6.83% on all alcohol categories for the 2025 Budget will exacerbate the pervasive illicit alcohol trade, which already constitutes over 20% of the total trade.”
In a statement released to the media, Diageo argues that “any above-inflation hike in excise will deal a damaging blow to the alcohol industry, which supports hundreds of thousands of jobs and generates billions in revenue for the government".
The company says it’s important for the GNU “to ensure that its decisions do not help fuel the illicit trade in alcohol products, and the criminality associated with these illegal activities”.
Sibani Mngadi, corporate relations director at Diageo South Africa, emphasised that the 2% above-inflation excise increase contradicted the National Treasury’s very own policy review.
“The proposed tax increase is at odds with Treasury’s findings, which explicitly discourage further tax hikes on spirits. Illicit trade has reached shocking levels in South Africa, and the excise decision by government will turn it into a full-blown crisis,” he says.
According to Diageo, in November 2024, Treasury published a review document titled Taxation of Alcoholic Beverages.
“It acknowledged that spirits are disproportionately taxed compared to other alcohol categories. Treasury concluded that no further increases are proposed for consideration for the spirits category.
“In a deeply concerning move, Treasury has gone against its own recommendations and research.”
Diageo adds that the Treasury review also identified illicit trade as a “serious challenge, requiring greater and concerted attention to curb both its supply and demand”.
Citing a study by market research firm Euromonitor, Diageo’s statement posits that the illicit alcohol market represents 21% of South Africa’s total alcohol market by value.
Smuggling accounts for 68% of this illicit trade, including non-duty-paid imports, diverted exports, and theft of duty-free stock. Euromonitor estimates that the government is losing R11.3 billion in tax revenue annually due to illicit trade.
Mngadi says: “Rather than increasing taxes, the focus should be on strengthening SA Revenue Service’s (Sars) capacity to combat tax evasion and recover the more-than R11bn lost annually to illegal alcohol trade.
“This approach would not only protect the legal alcohol industry but also boost government revenue without burdening consumers or encouraging illicit activity.”
Diageo emphasises that above-inflation increases in excise and the resultant increase in the illicit alcohol trade have disastrous consequences: livelihoods are negatively impacted across the value chain; alcohol-related deaths increase due to illegal concoctions; the scope of illicit syndicates and other criminal activities are expanded; and the revenue generated from legal sales dwindles.
“Last year's above-inflation excise tax increase of 6.7% also failed to deliver the expected revenue growth. Instead, Sars collected only 3.4% more in spirits tax revenue, as legal sales volumes declined,” Mngadi says.
“Diageo South Africa hopes the GNU’s budget deliberations will prioritise an excise regime that can expand the fiscus by promoting economic growth and job creation in the alcohol industry.”
In the meantime, it is hoped that consensus will be reached by the GNU over the VAT dispute that derailed the February 19 budget presentation of Minister of Finance Enoch Godongwana.
The postponement resulted from the ANC’s coalition partners refusing to accept a budget that would raise VAT to 17% to plug a R58bn shortfall in fiscal expenditure for the following year.
As the leading coalition partner, the DA is lobbying for cuts to ministerial largesse, such as travel expenses, and the closure of “white elephant” entities such as the National Youth Development Agency.
The ANC has said it is willing to accept a VAT increase renegotiation of less than 1%.
Over the weekend, it emerged that the ANC had threatened the DA with an EFF outreach should the budget speech again be compromised.
Now set down for March 12, the budget speech imbroglio is widely regarded as the biggest test to date for the GNU. – Additional reporting by Eugene Goddard.
