South Africa’s alcohol tax proposal draws warnings on illicit trade

South Africa’s plan to raise alcohol excise duties is drawing fresh warnings from spirits groups and tax experts, who say steeper levies could make legal products less affordable and give illicit sellers more room to grow.

The National Treasury held a virtual workshop on Thursday as part of its consultation on proposals to increase excise duties on alcohol in an effort to curb excessive drinking. During the session, industry representatives and economists argued that higher taxes, especially on spirits, could have unintended effects in a market where illegal alcohol is already entrenched.

Jeff Hardy, director-general of the Transnational Alliance to Combat Illicit Trade, told the workshop that South Africa offers a clear example of how tax policy, criminal markets and corruption can intersect. He said households tend to switch to illicit products when legal alcohol becomes sharply more expensive, and he argued that price is the main driver of that shift. In his view, the wider the gap between the price of legal spirits and illegal alternatives, the stronger the incentive for cash-strapped consumers to leave the formal market.

Hardy said South Africa’s average excise burden on beer and spirits is already about 20% higher than the global average. He linked that to broader concerns about tax leakage and the difficulty of containing illegal supply once it expands. He also pointed to the Covid-era restrictions in South Africa, when legal alcohol sales were disrupted and illicit trade gained ground, as a warning about how fast consumers can move outside regulated channels after a price or supply shock.

The Treasury has not finalized the changes, but current proposals are broadly projected to raise beer excise by 20% if adopted. Excise duty on a standard 750ml bottle of spirits now stands at R97.66. Even before any new increase, producers and importers say the tax component on spirits is already high in a market where inflation has squeezed household budgets.

Paco Soltero, director of public affairs at the World Spirits Alliance, said illicit alcohol is not a temporary problem and has become deeply rooted in many markets. He said four high-risk regions account for about 92% of illicit alcohol volumes worldwide. Asia-Pacific is the largest by size, he said, while Sub-Saharan Africa has the highest share of illicit trade of any region. That distinction matters, he argued, because a tax policy that may work in a market with strong enforcement and low illegal supply can produce different results where counterfeit or untaxed alcohol is widespread, easy to find and cheaper than licensed products.

That concern matters beyond tax rates alone. In South Africa’s beverage sector, a wider price gap between legal and illegal alcohol could potentially weaken formal sales of spirits and beer, put pressure on distributors and retailers, reduce the effectiveness of product controls and shift demand toward unregulated supply. It could also affect jobs and tax collection if consumers increasingly bypass the formal market.

Ilse Fieldgate, head of economic consulting and senior economist at Econometrix, said research by the firm estimated the illicit alcohol market at R25.1bn, compared with R39.8bn for the formal market. She warned that if illegal trade continues to expand, it could displace thousands of jobs across 12 sectors tied to the alcohol value chain. Those sectors include manufacturing, logistics, wholesale and retail activity that depend on legal production and sales.

Not everyone at the workshop agreed that excise increases would significantly worsen the problem. Prof. Charles Parry, chief specialist scientist at the South African Medical Research Council, said illicit alcohol is a real issue but a smaller policy risk than some industry groups suggest. He said the problem requires steady enforcement, stronger track-and-trace systems, arrests, prosecutions and meaningful penalties for repeat offenders, but he argued that the available revenue data does not show a rapid deterioration in the alcohol market.

Parry said alcohol tax receipts have risen in recent years, which in his view weakens the argument that illicit trade is accelerating at a pace that should deter public health policy. He contrasted that with tobacco, where illicit trade has been a more central feature of the debate. His position was that illegal alcohol is manageable if the state maintains consistent oversight and improves enforcement tools.

Anand Khelawon, the South African Revenue Service executive responsible for excise, said the agency has been expanding its use of data, intelligence and new track-and-trace technology to combat illicit trade. He said enforcement officials face daily risks in trying to stop illegal operators, but he also stressed that the issue cannot be handled by the revenue service alone. He said the response requires coordination between SARS, other public institutions and the private sector.

The workshop was chaired by Mpho Legote, the Treasury’s director for VAT, excise duties and subnational taxes. Legote acknowledged strong interest in the consultation, saying the session had been oversubscribed with requests to make submissions. He said the Treasury would continue to engage with industry groups and other stakeholders as it weighs whether higher alcohol excise can reduce harmful drinking without further strengthening the illicit market.