They say only two things in life are certain: death and taxes. And sure enough, during his recent annual budget address, finance minister Tito Mboweni announced a 7.4% increase in wine and brandy excise (and 9% on sparkling wine). Accordingly a 750 ml bottle of wine will now bear an excise duty of R3.15.

The prospect of paying more for wine hardly feels like a positive thing, but the wine industry has expressed appreciation about the result. This has caused many to wonder whether the increase was high or low, good or bad.

Excise

Excise duties and levies are imposed mostly on high-volume daily consumable products (such as petroleum and alcohol and tobacco products) as well as certain non-essential or luxury items (such as electronic equipment and cosmetics).

The primary function of these duties and levies is to ensure a constant stream of revenue for the State, with a secondary function of discouraging consumption of certain products harmful to human health or to the environment – hence the shorthand term “sin taxes”.

The revenue generated by these duties and levies amount to approximately 10% of the total revenue received by SARS. 

Although initially conceived as a selective consumer inflation to be included in the retail price and paid by the consumer, in practice only part of the tax is carried by consumers. The balance has been absorbed lower down the supply-chain, largely by producers. The government already gets a lion’s share of a wine producer’s income per hectare, so regular meetings with them are necessary to ensure they fully understand the landscape and what’s playing out on ground level.

Background

Following in-depth discussions with Treasury in 2003/04, the total tax burden (initially excise duties and VAT), was determined as a percentage of the weighted average retail selling price (RSP), for spirits, clear beer and wine. Further engagements with beverage industry role-players in 2014/15 established the current framework which determines the excise component.

The targets (revised in February 2015 to exclude VAT) were set at 11% of RSP for wine, 23% for beer and 38% for spirits. These targets provide a transparent basis for determining the level of excise taxes and allows the liquor industry to plan accordingly.  Vinpro has been actively lobbying government to keep to this framework, especially since for the last two years, wine was taxed above the agreed incidence rate, resulting in the excise-component to be 11.16% in 2017 and 11.56% in 2018.

An important distinction

Consumers are already familiar with the core inflation rate for food and non-alcoholic beverages, which currently is 4.5% (year-on-year). In the case of wine, however, this inflation peaked at 7.2% in August 2018 (up from 5.8% in December 2017). SUBsequently the excise was adjusted to 8.5% (an increase of 27c on 750 ml) in 2018 – well above the average wine-inflation and therefore cause for concern.

These increases prompted Vinpro to intensify calls on Treasury to honour its commitments, which seems to have borne some fruit this year. These factors put 2019’s comparatively mild 7.4% excise (an increase of 22 cents on 750 ml) into greater perspective. Wine was the only alcoholic beverage with a lower adjustment than 2018, with other beverages bearing the brunt of our country’s sin taxes.

The excise duty on sparkling wine has risen well above inflation in recent years, mainly due to the influence of high-priced imports. As a result, the difference between the excise duties on sparkling wine and still wine has increased substantially. It is proposed that the current difference between the excise duties on natural and sparkling wine be maintained by pegging the sparkling wine excise rate at 3.2 times that of natural unfortified wine.

Brandy has consistently exceeded its targets, but has received no such tax relief. Clearly there is still plenty of room for government to improve its tax relationship with the industry.

No excise increase should be viewed in isolation. Increases occur within an existing framework of pricing structures and excise policy, which underscores the necessity of industry advocacy bodies such as Vinpro and Salba to continue in presenting their case with the powers that be.

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