‘Sin Tax’ Hike in South Africa Will Backfire, Wine Exporter Says

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South Africa has got its approach to taxing alcohol wrong and needs to hear more arguments to make it change tack, according to the country’s largest wine exporter.

Distell Group Holdings Ltd. expressed frustration after alcohol drinks makers, smarting from bans that crippled their sales during coronavirus lockdowns, were hit with an 8% increase on excise duties in Wednesday’s budget. The increased levy is likely to boost the market for illicit booze that exploded during South Africa’s lockdowns.

While the government contends that the higher taxes are aimed at reducing harmful drinking, “I’m not sure that’s necessarily the case,” Richard Rushton, Distell’s chief executive officer, said in an interview. “These hikes are sadly just going to essentially push an increasing amount of consumption to the gray market.”

Estimated to have grown to 15% of the South African alcohol industry, the illicit market may have cost tax collectors 6.4 billion rand ($432 million) under various bans or restrictions prompted by efforts to curb the spread of Covid-19. The government has said excessive drinking leads to injuries that crowd hospital emergency rooms, just as the virus strains the health system.

“We are going to have to engage government again,” Rushton said. “Perhaps we didn’t do a good enough job in providing enough education around it. We’ll own that responsibility.”

The curbs on their industry have also spurred alcohol companies to put expansion plans on hold and the new taxes could threaten other investments and place jobs at risk.

“It can’t be assumed the higher taxes naturally all get passed on to the consumers, so we’re going to have to see the extent to which excise is passed on by all of our competitors and what that must mean by way of jobs,” Rushton said.

The Stellenbosch, South Africa-based company reported after Wednesday’s market close that earnings rose 16% in its first half through December. An expanded international business boosted earnings, while units in the rest of Africa are growing.

“Our east African strategy is starting to play out very well for us,” Rushton said. In West Africa and other oil-rich economies, where Distell has taken a more cautious approach, it’s also “pretty confident” about the outlook.

Distell’s shares have rallied 20% in Johannesburg this year, rebounding from their 28% slump in 2020.

©2021 Bloomberg L.P.

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