R300 billion in tax revenue disappears every year

The South African government misses out on R300 billion in tax revenue every year due to the illicit or shadow economy, which operates under SARS’ radar. 

This additional revenue could effectively eliminate the government’s full budget deficit in the current financial year. 

While SARS has poured time and resources into cracking down on illicit trade, particularly in cigarettes, it is yet to yield significant results. 

New SARS Commissioner Dr Johnstone Makhubu is hopeful that a new integrated disruption plan from the government will finally make a dent in the illicit economy.

Makhubu told Newzroom Afrika that SARS estimates the size of the illicit economy at 10% to 15% of South Africa’s total GDP. 

This means that it is worth around R1.2 trillion and could generate between R200 billion and R300 billion in additional tax revenue every year.

Makhubu’s predecessor, Edward Kieswetter, geared SARS up to crack down on the illicit trade by steadily rebuilding the capability lost during the era of state capture. 

“The hard lockdowns for alcohol and cigarettes during Covid only entrenched these illicit operators in the value chain,” Kieswetter has repeatedly explained. 

Apart from the demand for illicit goods becoming entrenched in the economy, the syndicates behind the supply have proven difficult to prosecute due to their sophisticated nature. 

“These are not single operators. They are syndicates. They work across borders and are often enabled by professional enablers and people in government or politics,” Kieswetter said. 

“It needs a system to function and track the flow of money across many individuals and organisations. These are highly sophisticated, criminal syndicates.”

Despite the taxman’s success in tackling the illicit economy over the past few years, it has continued to grow rapidly. 

SARS estimates that the illicit economy has grown at a faster rate than the formal economy and has gone from being worth the equivalent of 5% of South Africa’s GDP to between 12% and 15%.

The growth of the illicit trade is so strong that it is beginning to impact tax collections from legitimate businesses, which are being outcompeted by illegal traders.

The new plan

Makhubu inherits a lot of Kieswetter’s plans to tackle the illicit economy in South Africa, but also has renewed backing from the President and other law enforcement agencies. 

President Ramaphosa unveiled a national illicit economy disruption programme in his 2026 State of the Nation Address (SONA). 

This will meet some of Kieswetter’s desires for a unified whole-of-government approach to the issue of the illicit economy.

“Our own estimates tell us that 15% of the GDP is in the shadow economy, so it is vital that we dent that in a R8 trillion economy,” Makhubu said.

“We want to drill into that through a national effort through the national illicit economy disruption plan.” 

Makhubu explained that SARS cannot tackle the illicit economy on its own, as it requires enhanced resources from the police and Border Management Authority (BMA). 

This will help reduce the flow of illicit goods into South Africa and bring masterminds to justice, which will begin to erode the operations of the illicit economy. 

“We believe that by putting together the strengths of SARS, BMA, and the police, we should be able to dent the illicit economy in South Africa,” Makhubu said. 

“We will continue to pursue that plan as announced, and SARS will work harder than ever to play its role in that space.” 

However, no matter the amount of effort SARS puts in, there is a fundamental economic reality driving the popularity of the illicit trade. 

That is the extremely low cost that illicit traders can provide goods for, which undermines legitimate businesses and creates a new incentive for individuals to buy illegal products.

Kieswetter explained that this made the issue one that the entire government and society must tackle, with individuals who buy illicit goods held responsible. 

Without the demand for illicit goods, Kieswetter argued, there would be no supply that negatively impacts the fiscus, economy, and society.

Illicit products are significantly cheaper than their legitimate counterparts, with a pack of cigarettes in the shadow economy going for as little as R5.

This creates significant demand for these products, which can only be tackled by ensuring traders pay the appropriate levels of tax or are put out of business.

The SA Tobacco Transformation Alliance has estimated that, in 2023, South Africans smoked 37 billion cigarettes, but SARS only collected tax on 13 billion.