Alcohol and cigarettes in the 2025 Budget — anchor policy in data, not industry spin

In addition to updating the excise tax rates, the National Treasury’s Budget Reviews provide rich information on excise revenue collected from excisable products. Excise revenue data provides a rough guide to the success of the South African Revenue Service (SARS) in collecting excise taxes from alcohol and cigarette producers.

Producers in these industries commonly argue that excise tax increases lead to increases in illicit trade. Of course, this is a self-serving argument — these industries prefer the excise tax to remain unchanged because tax-induced price increases result in a decrease in consumption and, ultimately, a decrease in industry profits.

In this article, we focus on the most consumed type of alcohol in South Africa (beer) and the most consumed tobacco product (cigarettes).

Beer

In the 2025 Budget Speech, Finance Minister Enoch Godongwana announced a 6.75% hike in excise taxes on alcohol — two percentage points above the expected inflation rate. Beer has taken centre stage in the alcohol excise tax debate.

Predictably, the Beer Association of South Africa (Basa) warned of job losses and economic strain and has consistently argued that its contribution to the economy is substantial. Yet, its economic contribution is dwarfed by the costs of alcohol use, estimated at between R245-billion and R280-billion in 2009 (10–12% of GDP).

The beer industry also argues that excise tax increases will increase illicit trade (see here and here). The tactic is clear: by linking excise taxes to a supposed surge in illicit alcohol, the industry hopes to dissuade the National Treasury from increasing alcohol excise taxes.

The excise revenue numbers from the 2025 Budget differ from the industry’s rhetoric. If the illicit beer trade were increasing, as the industry suggests, we would probably see a decrease in legal (tax-paid) consumption — this is not the case (Figure 1, green line).

In the 2024/25 financial year, excise taxes were paid on about 3.5 billion litres of beer consumed in South Africa — a 0.75% increase in tax-paid volumes compared to the previous year. Zoom out further and the picture sharpens: between 2008/09 and 2024/25 tax-paid beer consumption grew at a compound annual rate of 1.8% per year — outpacing GDP growth and population growth over the same period.



In November 2024, the National Treasury published its 10-year review on alcohol taxation. Among other things, the review proposed different tax tiers for beer with different alcohol content levels. This builds on a regime introduced in 1998 that levies the excise tax on the volume of absolute alcohol in beer rather than on the volume of the beverage.

Under the current excise tax regime, higher excise taxes increase the incentive for beer producers to reduce the alcohol content of their products — a win for public health.

Castle Lite is a case in point. With 4.0% alcohol by volume (ABV), it has a lower alcohol content than most other popular beer brands (eg, Carling Black Label 5.5% ABV; Castle 5% ABV) and is therefore subject to less excise tax.

Since the start of the 21st century, South African Breweries has aggressively marketed Castle Lite as a premium beer, greatly increasing its market share. It had a 15% market share in 2023 and is South Africa’s third-largest beer brand (Euromonitor, 2024). This shows that, with appropriate marketing, SAB can convince consumers that a lower-alcohol beer is a desirable product.

A tiered structure, as proposed in the Treasury’s 10-year review but with better-calibrated thresholds, would greatly amplify incentives for the industry to reduce the alcohol content of their products. The Castle Lite response proves that the industry can adapt and shape the market.

Rather than raising spurious and unfounded arguments about illicit trade, the alcohol industry would do better by focusing on reducing the alcohol content in their products and getting their customers to buy lower-alcohol products.

Cigarettes

For cigarettes, the finance minister announced a nominal excise tax increase of 4.75%, in line with the expected inflation rate. Per pack of 20 cigarettes, the excise taxes increased from R21.77 to R22.81. For the past 30 years, the National Treasury has increased the excise tax by at least the expected inflation rate, despite significant industry opposition.

If one adds the excise tax, manufacturing costs and profits, wholesaler and retailer margins, distribution costs and VAT, the minimum retail selling price should be at least R35 per pack of 20 cigarettes. Any pack sold for less than this amount is likely illicit (ie, tax evaded).

The illicit cigarette trade situation is alarming. Legal (tax-paid) local cigarette production plummeted from 25.4 billion sticks in 2008/09 to just 8.7 billion sticks in 2024/25 — an average annual decrease of 6.4% per year over 16 years (Figure 1 above, red line).

Smoking prevalence has not dropped significantly over this period — in fact, it’s edged up modestly — indicating that the illicit cigarette market has exploded. Research suggests that the illicit cigarette market comprised less than 5% of the market in 2009, increased sharply between 2010 and 2020, peaked at 60% in 2021, and remained at these elevated levels in subsequent years.

In 2022, SARS lost R15-billion to tax-evaded cigarettes, and the amount of lost revenue has not decreased subsequently.

Yet, there is a glimmer of hope. In 2024/25, tax-paid cigarette volumes rebounded by nearly 10% after a 20% drop the previous year, suggesting that SARS may be gaining ground.

Whether this marks a turning point remains to be seen, but one thing is clear — to plug revenue gaps, some of the extra resources promised to SARS by the finance minister should be allocated to tackling the illicit cigarette trade.

Conclusion

The National Treasury’s alcohol and tobacco excise tax revenue data speak volumes. Legal beer consumption is on an upward trajectory despite the modest tax hikes, undermining the industry claims of growing illicit trade.

On the other hand, cigarettes present a costly problem — billions in lost revenue. While illicit trade in alcohol is not yet a problem that we see in the excise revenue data, SARS should introduce a traceability system for alcohol and cigarettes. There are at least nine African countries with traceability systems for alcohol and/or cigarettes: Democratic Republic of the Congo, The Gambia, Kenya, Malawi, Morocco, Sierra Leone, Tanzania, Togo and Uganda.

The way forward? Sharpen incentives for brewers to produce beverages with lower alcohol content, use some of the extra resources promised to SARS in this year’s Budget to improve tax compliance, and keep policy anchored in data, not industry spin. DM

Prof Corné van Walbeek is the director of the Research Unit on the Economics of Excisable Products (Reep) at the University of Cape Town. Sam Filby and Nicole Vellios are researchers at Reep.