Study shows ripple effect of 0.5% VAT increase and sin tax hike – The Mail & Guardian

File photo by Delwyn Verasamy/M&G

South Africa’s agricultural and alcoholic beverage sectors will be hit by a double whammy affecting production and sales if a controversial 0.5 percentage point increase in VAT kicks in on 1 May, along with a 6.75% excise duty hike on alcoholic beverages.

These higher taxes will lead to lower disposable income and second round effects on industries, with the ripple effect of lowering personal and corporate income tax collections, the National Agricultural Marketing Council (NAMC) said in an economic simulation study.

“Taking into account these general equilibrium effects, an increase in the VAT rate to increase government revenue by R30 billion is foreseen to increase a net tax collection of only approximately R20 billion,” the council said.

VAT is the second-largest contributor to tax revenue after personal income tax.

“It remains controversial due to its regressive nature since poorer households spend a larger proportion of their income on VAT-taxed goods, unlike wealthier individuals,” the council said.

It said industries selling goods most exposed to VAT, including vehicles, electronics, household luxury consumables, real estate transactions subject to VAT, and the retail sector, will be hardest hit.

“From the primary agriculture sector perspective, all the subsectors will be negatively impacted. The simulation results show that output or sales for the forestry subsector will fall by 0.4%, followed by livestock (0.26%), field crops (0.24%), and horticulture (0.23%), respectively,” the NAMC said.

“Whereas all food manufacturing industries will be negatively impacted … fish processing will experience the most drastic effect. Sales in the fisheries industry will fall by 0.41% in the medium term, followed by grains (0.34%), fruits and vegetables (0.33%), meat (0.29%), other food industries (0.15%) and beverages (0.14%), respectively.”

It noted that South Africa’s alcohol excise framework was introduced in 2004, setting a guideline tax incidence where excise duties and VAT accounted for specific percentages of the retail price for wine, beer and spirits.

“Adjustments to these guidelines over the years have seen excise duties consistently rise above inflation, sometimes exceeding the intended burden, thereby raising concerns among affected industries,” the council added.

This “sin tax” has to some degree been used to ameliorate the harmful use of alcohol which has been identified as a major public health risk, impeding progress towards the UN’s health-related sustainable development goals.

Alcohol is responsible for 5.1% of the global burden of disease and injury, with the World Health Organisation (WHO) reporting over 3.3 million alcohol-related deaths annually, accounting for 5.3% of all deaths worldwide.

As part of the WHO Global Strategy (2022–2030), there is a renewed focus on using taxation to reduce alcohol harm as a public health priority. However, despite increases in excise duties over the years, per capita consumption of alcohol by South Africans remains relatively high at a rate of 7.1%, according to a 2024 World Bank report.

According to the Drinks Federation of South Africa, in 2022, the beverage industry contributed approximately 3.6% (about R226.3 billion) to South Africa’s GDP and 6.7%, or R96.9 billion, in government tax revenue collection.

The alcoholic beverage industry employs approximately 500 000 people. In 2022, the wine sector — which has a labour force of just over 270 000 people, just under 86 000 of them  employed on farms and in cellars — contributed R56 billion to the economy.

Proposed adjustments to the alcohol excise taxation policy framework will include the introduction of a three-tier, progressive excise duty rate structure for wine and beer based on the level of alcohol content. The proposed hike, with a focus on wine and brandy, aims to raise the effective excise rate by a factor of 1.4 to 1.8 times, depending on alcohol content.

Statistics South Africa says the alcoholic beverages industry as a whole produces more than R200 billion worth of products, and contributes around R60 billion in indirect taxes, mainly VAT, excise and import duties.

“Output from the agriculture industry is a key input to the alcoholic beverages industry. For example, more than R7 billion worth of viticultural products produced locally each year are linked to the wine industry,” the NAMC said.

“Excise duties on alcohol and tobacco products alone are more than R40 billion annually, of which the wine and brandy industry is estimated to contribute about R7 billion.”

It said previous studies had shown that raising VAT can lead to an increase in poverty and inequality, adding: “From a food security perspective, while South Africa is considered to be food secure at the national level, many households are food insecure, since not all households have access to adequate food.”

Stats SA reports that approximately 3.7 million households faced moderate to severe food insecurity and 1.5 million families endured severe hunger in 2023.

According to the NAMC, should the targeted R30 billion share of the budget shortfall be recovered through a general increase in VAT, the predicted effects would be negative across most economic variables.

“Results suggest that, in the first two years, the proposed VAT increase will have inflationary effects of 0.04% and 0.03% in years 2025 and 2026, respectively. However, from the year 2027, the [consumer price index] will slowly decline moving towards baseline due to the slightly depressing effect of higher taxes and lower disposable incomes that reduces demand-side pressure,” it said.

“Results also suggest that GDP will be negatively impacted in the medium term, while the debt-to-GDP ratio does not fall as much as may be anticipated.”

The NAMC said an increase in excise duties on alcoholic beverages would lead to an estimated 1.5% decline in sales.

“This, in turn, could place up to R150 million in wage earnings at risk within the industry, along with potential indirect losses in the agricultural and retail sectors. Our simulation suggests that, for every R1 billion increase in excise duties collected due to higher tax rates, other tax revenue collected may fall by around R0.25 billion,” the council said.

“The analysis of the proposed increase in VAT and excise tax indicates that, while these tax measures will generate additional government revenue, they will also have adverse effects on economic growth, household consumption and productivity among key agricultural industries.”