Syntheda

Diageo South Africa has formally requested Finance Minister Enoch Godongwana refrain from implementing further excise duty increases on alcoholic beverages in the forthcoming national budget, as the spirits industry faces mounting fiscal pressure that threatens both manufacturers and consumers.

The multinational beverage company's intervention comes as excise duty on spirits is projected to surpass R100 per 750ml bottle should the National Treasury proceed with its customary annual adjustment, according to TimesLive. The threshold represents a significant psychological and economic barrier for an industry already contending with subdued consumer spending and intensifying regulatory pressures across South Africa's alcohol sector.

Cumulative Tax Burden Reaches Critical Threshold

South Africa's alcohol industry has experienced consecutive years of above-inflation excise duty increases, with the National Treasury historically adjusting rates upward by inflation plus an additional percentage point. The cumulative effect has progressively elevated the tax component of alcoholic beverages, particularly spirits, which attract higher duty rates than beer and wine under the country's tiered excise framework.

For spirits manufacturers, the R100 per bottle threshold represents approximately 40-45% of the retail price for standard products, depending on brand positioning and distribution channels. This tax intensity places South Africa among the higher-taxed alcohol markets on the African continent, though still below European Union averages. The South African Revenue Service collected R17.2 billion in alcohol excise duties during the 2024/25 fiscal year, representing a critical revenue stream for the fiscus amid constrained economic growth.

Industry analysts note that further duty increases could accelerate consumer migration toward illicit alcohol products, which circumvent excise collection entirely. The South African Liquor Brand Owners Association has previously estimated the illicit alcohol trade costs the economy approximately R6 billion annually in lost tax revenue, a figure that expands when enforcement costs and public health impacts are factored into calculations.

Economic Headwinds Compound Industry Challenges

Diageo's appeal to the Finance Minister reflects broader economic pressures confronting South Africa's formal alcohol sector. Consumer disposable income remains constrained following several years of elevated inflation, electricity supply disruptions, and labour market weakness. The South African Reserve Bank's most recent consumer confidence index registered negative territory, indicating households are reducing discretionary spending categories including premium alcoholic beverages.

The spirits category has proven particularly sensitive to price elasticity, with premium and super-premium segments experiencing volume declines when retail prices breach psychological thresholds. Diageo SA operates production facilities in South Africa and distributes both locally manufactured and imported brands including Johnnie Walker, Smirnoff, and Tanqueray across the southern African market.

Beyond immediate revenue concerns, the company has emphasized employment implications of sustained tax increases. South Africa's alcoholic beverages value chain employs approximately 250,000 workers across agriculture, manufacturing, distribution, and retail segments. Trade unions representing beverage sector workers have previously aligned with industry positions on excise policy, arguing that excessive taxation threatens formal sector employment while failing to achieve stated public health objectives.

Budget Balancing Act for National Treasury

Finance Minister Godongwana faces competing pressures as he finalizes the 2026/27 national budget scheduled for presentation to Parliament in late February. The National Treasury must balance revenue generation imperatives against economic growth considerations, with alcohol excise duties representing a politically expedient revenue source that typically encounters limited parliamentary opposition.

Public health advocates have consistently supported excise increases as a mechanism to reduce alcohol consumption and associated social harms. The World Health Organization recommends alcohol taxation as among the most cost-effective interventions for reducing harmful drinking patterns, particularly in middle-income countries where alcohol-related disease burden remains elevated.

However, the efficacy of South Africa's excise policy has drawn scrutiny from economists who note that successive increases have failed to materially reduce per-capita alcohol consumption while potentially expanding the untaxed illicit market. The South African Revenue Service has intensified enforcement operations targeting illicit alcohol production and distribution, though resource constraints limit the scope of interventions across informal settlements and rural areas where unregulated products proliferate.

The Finance Minister's decision on alcohol excise duty will signal the government's broader approach to sin tax policy amid fiscal consolidation efforts. With limited scope for income tax increases following several years of bracket creep adjustments, excise duties on alcohol, tobacco, and sugary beverages represent among the few remaining revenue levers available to National Treasury without triggering significant political backlash or economic disruption.

Market participants await the budget speech for clarity on whether Godongwana will maintain the inflation-plus adjustment formula or implement a freeze as advocated by Diageo and broader industry representatives. The outcome will establish precedent for excise policy direction through the medium term, with implications extending beyond the spirits category to the entire alcoholic beverages sector.