One mistake that cost SARS’ Edward Kieswetter R40 billion 

South Africa has lost out on R40 billion in excise tax revenue due to the rise of the illicit cigarette market, with the illegal trade of alcohol and fuel also robbing the fiscus of vital resources. 

The problem is only getting worse, with the country estimated to lose out on R30 billion in tax revenue from these illicit markets in the current financial year. 

Illicit cigarette and alcohol sales have boomed since the pandemic-era lockdowns, where the legitimate sale of these products was prohibited. 

This led many to get their fix through the illicit market, which has now become entrenched as consumers continue to hunt for affordability amid a rising cost of living. 

The problem has become severe enough for Finance Minister Enoch Godongwana to refer to it in his recent Medium-Term Budget Policy Statement. 

Godongwana said illicit trade threatens the local economy, endangers consumers, and robs the fiscus of billions in revenue. 

“Each year, billions of rands in taxes go uncollected, funds that could have closed our revenue gap and avoided tax increases entirely,” Godongwana said. 

He revealed that SARS estimates the government has lost around R40 billion in excise revenue due to the illicit cigarette trade alone since 2020. The same is true for illicit alcohol and fuel. 

SARS is battling to clamp down on this burgeoning trade, with it suspending three licenses for non-compliant tobacco production in the past six months. 

Godongwana’s mention of 2020 is crucial in identifying the source of the problem and what has made it so difficult for the government to tackle. 

Of the R120 billion estimated to be lost to illicit trade in the past 20 years, R40 billion has been lost in the past four years. 

This spike in illicit trade was due to the surge in illegal alcohol and tobacco sales during the Covid-19 pandemic. 

The Transnational Alliance to Combat Illicit Trade (TRACIT) explained how illicit trade became entrenched in South Africa during this period, which has made it exceedingly difficult to tackle. 

It said that South Africa’s strict lockdowns, which banned the legal sale of alcohol and tobacco products, exaggerated the country’s illicit trade problem. 

“South Africa’s nationwide ban on domestic sales of alcohol production and transportation during the pandemic had a significant effect on consumption patterns and provided a massive boost to organised criminal involvement in the production and supply of illicit alcohol,” TRACIT said.

During these lockdowns, when legitimate sales were prohibited, illicit traders had the opportunity to rapidly take market share. 

In particular, they provided cash-strapped consumers with cheaper, more accessible alternatives to legitimate products.

This undid decades-long efforts to formalise the alcohol trade in South Africa and regulate the production of products.

SARS capacity

Another factor that exacerbated the growth in illicit trade in South Africa was the erosion of SARS’ enforcement capacity during the State Capture era. 

This left it largely unable to prevent, limit, and prosecute cases of illicit trade, as it no longer had the investigative capacity it once had in the early 2000s. 

Prior to the State Capture era, SARS was effectively combating the rise in the illicit trade of cigarettes and alcohol through its extensive investigative powers. 

As it slowly rebuilds this capacity, the tax authority is slowly cracking down on the illicit trade of goods in South Africa by going after the masterminds and beneficiaries of the trade. 

However, SARS Commissioner Edward Kieswetter has been clear in saying that this challenge is vastly different from combating the illicit trade prior to the pandemic. 

Kieswetter explained that the illicit market is now firmly entrenched in the local economy and is proving a popular source for affordable cigarettes and alcohol. 

These illicit players are able to offer their products at lower price points due to the fact that they do not collect the stipulated amount of excise tax on sales and VAT. 

In a country with a stagnant economy and a rising cost of living, many ordinary people turn to the illicit trade to save money, not for ease of access. 

Kieswetter said illicit cigarettes can be sold for as little as R10 for a box of 20. It is not commercially viable for a legal, tax-compliant vendor to sell a box of 20 cigarettes for less than R36 to the end consumer. 

The minimum tax rate per packet of cigarettes is R26.22, meaning that no matter the efficiency of a legal operator, they cannot sell the product for less than this amount. 

As a result of the significant price difference between legitimate and illicit products, legal cigarettes are becoming less affordable to consumers, who continue to migrate to the illegal cigarette market at an alarming rate.

Part of this problem goes back to Godongwana and the National Treasury, with repeated excise tax increases pushing up the price of legitimate goods, making them increasingly unaffordable. 

Consumer Goods Council CEO Zinhle Tyikwe has pointed out that repeated increases to excise tax has exacerbated this affordability issue. 

Tyikwe has repeatedly criticised plans to increase sin taxes sharply, saying that it would only drive more South Africans towards illicit suppliers for cheaper products. 

“Proposing to increase the so-called sin taxes is both anti-growth and counterproductive and will simply encourage the already entrenched illicit trade,” Tyikwe said.

“With such an entrenched illicit market, whose growth was fuelled by Covid-19 restrictions on liquor and tobacco sales, an increase in taxes will drive consumption to the illicit market where the selling prices are unaffected.” 

“Smokers and drinkers will switch to cheaper, illicit or counterfeit brands, denying National Treasury much-needed revenue to balance the budget.”