Sin Tax in South Africa’s 2025 Budget
Watch the PowerFM interview here: Budget 2025: Impact of Sin Tax increase on consumer spending
South Africans can breathe a sigh of relief that government proposed a more palatable 0.5% VAT increase in the 2025 budget, but smokers and drinkers did not get off as easily.
The 2025 National Treasury Budget Review outlines a 6.75% increase on excise duties for alcoholic beverages and 4.75% increase for tobacco products including cigarettes and vaping systems.
These excise taxes, commonly referred to as “Sin Tax,” are levies placed on non-essential items to discourage the consumption of products with negative externalities. In addition to alcohol and tobacco taxes, South Africa maintains a “health promotion tax” on sugary drinks, though this remained unchanged for the current budgetary period. These taxes serve dual purpose, generating government revenue while discouraging the consumption of harmful substances. Furthermore, it alleviates strain on the healthcare system caused by alcohol and tobacco-related health issues and violence.
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Sin Tax generates significant revenue for the government – alcohol tax alone provided R41.5 billion in 2022/23. This contributes to South Africa’s national budget, which includes total revenue of R2.1 trillion against total expenditure of approximately R2.5 trillion. One of South Africa’s fiscal challenges stems from its narrow tax base: there were only 6.6m assessed taxpayers in 2023, with the top 5% (about 340 000 people) contributing 28% of total personal income tax.
Spending balance: Government Income and Expenditure
With a bloated government bureaucracy on one side (there are 1.23m government workers, roughly one for every 50 citizens), and a desperate 20 million+ social grant recipients on the other, either government expenditure needs to be cut, or the tax base needs to be widened. Roughly, 43.6 million adults are contributing to VAT through their daily expenditure, with Sin Tax opening another source of revenue from the citizenry. About half of these adults drank alcohol in the past month. Even more drank fizzy drinks, contributing to the ‘health promotion tax’, coupled with the 6 million smokers and government has a revenue stream of another R45 billion for the fiscus. This equates to only 2% of government revenue but covers 20% of our social grant expenditure. Watch this space – If the government were to expand excise tax to include fruit juice and fruit juice concentrates, the beverage consumption from another 32 million people would be brought into the fiscus.
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How Sin Tax Works
Manufacturers, importers, and retailers are responsible for paying excise taxes to the government but typically incorporate these costs into product prices, passing the burden to consumers and potentially accelerating inflation. According to an Oxford Economics study, 25% of the final price of beer consists of excise taxes. In practical terms, of the R350 paid for 24 cans of Black Label at Makro, approximately R88 is excise taxes. Including VAT means 38% of the cost of beer is government tax.
Purpose of Sin Tax
The Covid alcohol bans gave insight into the impact of alcohol on society. Quite often it is individuals who do not consume alcohol who carry the cost of these negative externalities, either through interpersonal violence or through a shared burden on the health system. One study found that the alcohol bans reduced injury-induced mortality in the country by at least 14%, with the majority of this reduction occurring among men. It also found a significant drop in violent crimes including homicide, assaults, and reported rape cases.
Unintended Consequences
Sin Tax can have negative unintended consequences, such as encouraging growth in illegal imports that generate no tax revenue. South African studies estimate that between 14% and 22% of the alcohol market is illicit.
Another potential drawback is that excessive taxation could reduce consumption, ironically resulting in decreased tax revenue. Research cited by the Treasury indicates that a 1% increase in the price of alcohol products leads to a demand reduction of 2% among light drinkers and 0.7% among heavy drinkers. Research in the United States estimates that a 1% rise in the price of tobacco and alcohol leads to a 5% decline in sales.
Additionally, the potential for job losses if industries become uncompetitive must be considered, as this could affect the broader economy. It’s worth noting that beer contributes more than 50% of excise tax revenue due to its high consumption volume in South Africa.
Using data from MAPS, a survey of 20,000 South Africans conducted by the MRF, we can examine how these taxes affect different population segments:
Alcohol Consumption
South Africa ranks among the top ten countries globally for per capita alcohol consumption at around 7.2 litres per person per year. In 2022, total liquor consumption was estimated at 4.5 billion litres, with beer accounting for 3.2 billion litres or 70.8% of total alcohol consumption by volume.
The MAPS data reveals that half of South African adults consumed alcohol in the past month, with beer being the most popular choice, particularly among men (72% of weekly beer consumers are male). Single and divorced individuals are more likely to drink than married people, and younger generations, especially Generation Y (average age 34), consume more alcohol than Baby Boomers (average age 66). Consumption spans all income levels, with the average beer drinker being 37 years old.
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Smoking & Vaping Habits
More than 6 million South Africans report smoking, with over 2 million indicating they vape daily. Interestingly, 2.8 million smokers admit they intend to quit in the near future—perhaps the nearly 5% increase in Sin Tax could provide the incentive they need.
Smoking is particularly prevalent among people in their early 20s (young singles) and middle-aged individuals, with vaping especially common among 45 to 54-year-olds and within the Indian population. Smoking demonstrates a strong male and coloured demographic bias. The average smoker is 38 years old, while vapers tend to be slightly younger, particularly irregular vapers. Among the Sin Tax-affected groups (alcohol, sugary drinks, and tobacco users), smokers generally fall on the lower end of the income spectrum, with sports drink consumers representing the wealthiest category.
“In real terms, the excise tax increases translate to modest price hikes—a can of beer will cost 16 cents more, and a bottle of wine will increase by 48 cents. While these increments may seem negligible, they must be considered in the context of an economy experiencing 0.6% growth, 4.4% inflation, 32% unemployment, and 20 million citizens dependent on government grants. Under these circumstances, a breaking point may eventually be reached,” concludes Eighty20.