One decision that costs South Africa R30 billion a year

The government’s decision to ban cigarettes and alcohol during COVID-19 lockdowns has cost the country billions in tax revenue over the past few years, as it allowed the illicit market to flourish.

A 2023 study by the Transnational Alliance to Combat Illicit Trade (TRACIT) showed that illicit trade is one of the biggest threats to stability and economic growth in South Africa – and Covid-19 lockdown restrictions are largely to blame.

“The Covid-19 pandemic provided wide opportunities for illicit traders to adjust and expand their operations during a time when government-imposed lockdowns, bans, and other restrictions disrupted legal markets and created shortages,” said TRACIT Director-General Jeffrey Hardy. 

“For South Africa to restart and grow its economy, it must formulate policies and implement programs that deter and preclude illicit traders from consolidating roots in the post-pandemic economy.”

TRACIT explained that, in the case of alcohol and tobacco, government-imposed bans enabled criminal groups to exploit the situational supply shortages and entrench and expand their positions in illicit markets.

At the same time, efforts to tackle illicit trade were diminished as law enforcement agencies were forced to redirect resources to Covid-19-related activities, such as enforcing quarantines.

The Bhekisisa Centre for Health Journalism previously reported that, between 2002 and 2009, illicit trade constituted around 5% of the cigarettes sold in South Africa.

However, today, this number has risen to 54%, which lowers tax revenue and renders the country’s anti-smoking plans less effective.

Bhekisisa attributed the rise in illicit cigarette trade to several events that occurred between 1990 and 2020.

Between 1990 and 2010, tobacco giants significantly increased their prices in response to higher sin taxes. This encouraged smaller manufacturers to enter the market at far lower prices.

Bhekisisa said that in 2014, the South African Revenue Service (SARS) commissioner at the time, Tom Moyane, also dismissed the organisation’s illicit trade sleuths and senior tax experts.

In 2020, the Covid-19 pandemic gave rise to government bans on the sale of cigarettes. 

However, the government did not ban the rest of the tobacco supply chain, like exporting and manufacturing, which saw the illicit cigarette trade boom.

These findings were supported by research on the illicit cigarette market from University of Cape Town PhD candidate Nicole Vellios.

In 2022, Vellios updated previous research that provided estimates of illicit trade from 2002 to 2017 to include estimates for 2018 to 2021. 

Using gap analysis, she estimated that between 2002 and 2009, the illicit cigarette market accounted for around 5% of the total market.

“Since 2009, the illicit cigarette market has increased sharply, and by 2017, illicit trade accounted for 30% to 35% of the total market,” Vellios said. 

“By 2020, illicit trade was around 54%. The illicit market was greatly stimulated by the 20-week sales ban in 2020 when no cigarettes were sold legally and when the government received no excise revenue for cigarettes. 

“In 2021, the illicit market remained at around 54%.”

Tax Justice SA estimates that more than R20 billion in tax revenue was lost last year due to the illegal tobacco trade.

“The illegal tobacco trade has grown 1,000% in a decade and robs the nation of R50 million every day,” according to Tax Justice SA.

The organisation said that almost 15 million illegal cigarettes are smoked every day in South Africa, and 3 out of 4 informal retail shops sell illegal products.

A similar problem has arisen with illicit alcohol sales, particularly after the Covid-19 lockdown restrictions on alcohol.

According to the TRACIT report, South Africa’s market for illicit alcohol is historically large, with SARS estimated to be losing out on R11 billion in excise tax revenue a year due to illicit alcohol trade. 

In comparison, this represents the largest fiscal loss from illicit alcohol out of the 7 African countries measured in Euromonitor’s global study on illicit alcohol trade.

It said this historic problem was only exacerbated by Covid-19 restrictions.

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

“Illicit traders seized the opportunity to provide cash-strapped consumers with easy access to cheaper alternatives, almost doubling their market share in less than a decade.” 

A survey on alcohol consumption in South Africa found that between July and November 2020, the majority of respondents purchased alcohol illegally while Covid-19 restrictions were in place. 

By volume, illicit sales currently represent 22% of the South African alcohol market, undoing a decade-long drive to formalise the alcohol sector in South Africa and bring it under regulatory control.

Tax Justice SA estimates that the illegal alcohol trade costs South Africans an annual R6 billion, with around 500 million litres of dangerous illegal alcohol being consumed in the country every year.

There are varying estimates of how much the ban on alcohol and tobacco has cost South Africa in tax revenue over the past five years.

However, all sources point to a substantial and ongoing loss of tax revenue due to illicit sales.

Tax Justice’s figures show that illicit tobacco products cost South Africa R20 billion in tax revenue in 2023, and illicit alcohol costs an estimated R6 billion every year.

Therefore, the two illicit markets were responsible for an estimated R26 billion in lost tax revenue in 2023, although this figure could be far higher.

This figure is in line with SARS’ estimate that illicit trade, in general, costs the country around R100 billion in tax revenue every year.