Big problem with government’s new alcohol and tobacco taxes

The government’s above-inflation increases to South Africa’s so-called ‘sin taxes’ present a significant risk, as it could encourage consumers to support the illicit market rather than legitimate retailers.

Efficient Group chief economist Dawie Roodt warned that this could have far-reaching consequences for consumers and the government’s tax revenue.

His comments come after Finance Minister Enoch Godongwana presented the National Treasury’s 2025 Budget on Wednesday, 12 March 2025.

In this Budget, the government proposed implementing several measures to increase its revenue and meet the country’s growing expenditure needs.

One of these measures was above-inflation increases in excise duties – sometimes referred to as “sin taxes” – on alcohol and tobacco.

The South African Revenue Service (SARS) explains that an excise tax is indirect duties, levies and taxes imposed on certain locally manufactured and imported goods, which are consumed in South Africa

Excise duties and levies are imposed mostly on high-volume daily consumable products like alcohol and certain non-essential or luxury items like cosmetics. 

“The primary function of these duties and levies is to ensure a constant stream of revenue for the state, with a secondary function of discouraging consumption of certain harmful products,” it explains.

The revenue generated by these duties and levies amounts to approximately 10% of the total revenue received by SARS.

In the 2025 Budget, the National Treasury proposed increasing excise duties on alcoholic beverages by 6.75% for 2025/26.

It further proposed increasing tobacco excise duties by 4.75% for cigarettes, cigarette tobacco, and electronic nicotine and non-nicotine delivery systems, i.e., vaping. 

The proposed increase for pipe tobacco and cigars is 6.75%.

These above-inflation increases in excise duties are expected to generate R1 billion in revenue for the state in 2025/26, R1.06 billion in 2026/27 and R1.13 billion in 2027/28.

In the Efficient Group’s post-Budget event held on the same day, Roodt warned that increasing excise duties this significantly is becoming dangerous.

“This is really getting dangerous because we already have a major problem with illegal tobacco and illegal cigarettes because it’s so much cheaper,” he explained.

“You can buy cigarettes for so much cheaper on the black market, and the same is now happening with alcohol.”

He said black market alcohol is becoming increasingly available and significantly cheaper because of the significant taxes the government places on legal alcohol.

“We shouldn’t be increasing the excise duties on these products by this much because you are simply forcing people to start buying in the black market where taxes are not applicable and where these products are significantly cheaper,” he warned.

“We are basically forcing people to buy illegal stuff because the legal stuff is getting far too expensive.”

This is concerning, as South Africa already struggles with large illicit markets in the tobacco and alcohol industries.

SARS previously estimated that the illicit trade costs South Africa arounf R250 million every single day – or R100 billion every year.

According to Tax Justice South Africa (TJSA), the biggest tax-evading industries in the country include illicit trading in clothing, tobacco, alcohol, medical drugs and fuel.

Illicit alcohol

TJSA said the illegal alcohol industry costs South Africans R6 billion every year and estimates that 500 million litres of dangerous illegal alcohol is consumed in the country every year.

“The illicit alcohol trade is completely unregulated. There are no restrictions on what criminals are selling or who they’re selling to,” the organisation explained. 

“Not only does illegal alcohol often contain fatal levels of alcohol and toxic ingredients, but it also costs the country’s finances over R16 million every single day.”

“These criminal alcohol sellers cannot be allowed to get away with it.”

Following the announcement of the government’s above-inflation increases in these excise duties, Heineken Beverages South Africa warned that this would fuel the illicit alcohol market.

It said these increases, along with the proposed hike in value-added tax, render a double blow to consumers and the legal alcohol industry.

“Rather than achieving its intended goals of reduced consumption and increased revenue, this tax increase will drive financially pressured consumers toward illegal alternatives,” the company warned. 

“The growth in illicit trade grew from 13% of the total alcohol market in 2012, to 14.5% in 2017 and 22% in 2020.” 

It said this growth has occurred alongside consistent and continued above-inflationary excise increases imposed on legal and compliant businesses.

 “In simple terms, these higher taxes will fuel illegal trade,” the company said.

Illicit tobacco

TJSA estimates that the illicit tobacco trade resulted in more than R20 billion in tax revenue being lost in 2024.

“R20 billion would pay for solar systems to take 20 small towns annually off the Eskom grid forever,” the organisation said.

Illegal cigarettes are manufactured in factories in South Africa, and an estimated 15 million illicit cigarettes are smoked in the country every day.

According to the Economics of Tobacco Control Unit at the University of Cape Town (UCT), the illegal cigarette trade has increased by 1,000% in a little over a decade.

This means that the illegal cigarette market is outpacing the legal market.

The same UCT study found that the illicit cigarette market comprised 5% of the market in 2009, peaked at 60% in 2021, and decreased to 58% in 2022.

The incredible growth of South Africa’s illicit cigarette and alcohol market can be largely attributed to the lockdown restrictions the government put in place during the Covid-19 pandemic.

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.