Edward Kieswetter kisses R20 billion goodbye

The government loses out on annual tax revenue of around R20 billion from the illicit cigarette and alcohol trades alone, and sin tax will likely make the problem worse. 

This is feedback from Zinhle Tyikwe, the CEO of the Consumer Goods Council of South Africa (CGCSA), who outlined the disastrous impact that tax hikes could have on consumers. 

The government is estimated to face a funding gap of as much as R60 billion and has proposed numerous tax increases to plug the hole. 

This includes potential increases to VAT and above-inflation increases to sin taxes on alcohol and tobacco, amongst other tax changes. 

“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. 

Crucially, it would also discourage job-creating investment and continue to cost the government much-needed revenue in the future. 

Tyikwe explained that the illicit market in South Africa is rife not only in alcohol and tobacco but extends to other products such as pharmaceuticals, food, and clothing. 

The illicit economy thrives on counterfeit and fake goods and is estimated to account for as much as 10% of the local economy. 

Tyikwe said it is estimated that the South African Revenue Service (SARS) could be losing over R8 billion annually from the sale of illicit cigarettes alone.  

Regarding the alcohol sector, the illicit alcohol market alone is estimated to be worth R20.5 billion—22% of market share—resulting in a R11.3 billion annual loss to the fiscus.

In the tobacco sector, a study by BMJ Open shows that the illicit cigarette market comprised 5% of the market in 2009, peaked at 60% in 2021, and decreased to 58% in 2022. 

Accounting for reduced consumption if cigarette prices had been higher (had the illicit market not existed), the government lost R15 billion in excise revenue and R3 billion in VAT revenue in 2022. 

From 2002 to 2022, the government lost R119 billion in excise and VAT revenue, 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,” Tyikwe says.

The National Treasury argues that higher alcohol taxes will reduce consumption and address social costs, such as reduced productivity, increased road accidents, and insurance claims. 

However, the proposed increases in alcohol excise tax and VAT threaten economic stability without achieving their intended health benefits. 

“While taxes may marginally influence purchasing behaviours, they have not significantly reduced alcohol harm. Faced with higher prices, drinkers do not necessarily consume less. They opt for alternative sources, such as illicit alcohol.”

Tyikwe said the proposed excise tax changes are counterproductive and could have damaging and far-reaching economic and social consequences. 

The proposed above-inflation excise tax increases – ranging from 40% to 80% for wine, 20% for beer, and CPI+4% for spirits – would ripple through the entire alcohol value chain.

This value chain supports hundreds of thousands of jobs, and these tax increases would disproportionately impact small businesses, informal workers, and rural communities.

 “What is at stake here are 500,000 direct jobs created by the alcohol sector – half in the informal sector – and 1.15 million livelihoods.” 

An estimated 86% of the workers directly employed by the liquor industry are from previously disadvantaged backgrounds. 

For tobacco products, an increase in tobacco excise duty will undoubtedly widen the gap between the lowest-priced legal products and illicit products on which taxes are not paid. 

Illicit cigarettes can be sold for as little as R5 per box of 20. Research shows that it is not commercially viable for a legal, tax-compliant supply chain to sell a box of 20 cigarettes to the end consumer for under R36.

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

Tyikwe said the rising threat of illicit and counterfeit trade demands immediate action, or it will expand, creating severe public health and safety risks. 

Unregulated, low-cost alcohol and tobacco products endanger public health and also destabilise legitimate businesses and the community’s well-being.

Tighter law enforcement, including dismantling the criminal underground network involved in illicit and counterfeit trade – including asset forfeitures – is needed. 

Tyikwe also called on the government should capacitate SARS to enable it to collect outstanding tax revenues, which it estimated at R800 billion.