South Africa kisses R120 billion goodbye

South Africa has lost out on around R120 billion in tax revenue from the illicit trade in tobacco products and alcohol in the past twenty years. 

Worryingly, most of the revenue loss has occurred in the past few years as the illicit trade flourished during the COVID-19 pandemic. 

The illicit trade also benefited from SARS’ loss of capacity during the state capture era, before which it effectively tackled the issue. 

This lack of enforcement capacity is one of the key issues preventing the country from improving its ranking on the Illicit Trade Index, which ranks it 60th according to the Transnational Alliance to Combat Illicit Trade (TRACIT). 

The organisation said that South Africa’s aspiration to play a growing role in global trade contradicts its commitments to mitigate the illicit trade of goods. 

TRACIT said that Brazil, South Africa, and China are notorious for harbouring some of the largest markets in the world for illicit products. 

South Africa ranks above average in some metrics, such as legislation, regulation, and tax practices. However, the country struggles to prosecute criminals and those who enable the trade from within the government. 

TRACIT also pointed out the country’s inability to crack down on the masterminds behind criminal syndicates and illicit trade enablers within companies and the government. 

Another major area for improvement is the prevention of money laundering and illicit financial flows, which enable illegal trade to flourish.

While the illicit trade of goods poses a serious health risk to individuals, as products are not regulated or safety checked, it also significantly negatively impacts tax revenue. 

The illicit sale of cigarettes, for example, costs the government around R20 billion a year in tax revenue from excise tax and VAT not being levied on the sale of the products. 

Euromonitor International’s research has revealed that the illicit trade in alcohol is also a significant headache for SARS, resulting in around a R11 billion loss to the fiscus.

As a result, it is estimated that the government has lost out on around R119 billion in excise and tax revenue from the illicit rade in the past twenty years. 

Only getting worse

The problem is only likely to get worse as SARS has experienced several setbacks in its fight against illicit cigarette sales, and excise tax increases will make illicit products increasingly attractive to South Africans. 

SARS has tried to crack the whip on illicit trade in South Africa, which has previously been very effective in limiting the sector’s growth. 

This all changed during the COVID-19 pandemic and the associated lockdowns, which limited the legitimate sale of tobacco and alcohol products. SARS had also lost much of its enforcement capacity during state capture. 

TRACIT said the country’s strict lockdowns that banned the legal sale of alcohol and tobacco products exacerbated South Africa’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.

However, SARS Commissioner Edward Kieswetter has been clear that one of the major drivers of the sector’s growth is its ability to offer tobacco and alcohol products at much cheaper price points. 

In a country with a rising cost of living and a stagnant economy, many ordinary people turn to the illicit trade to save money. These products are often cheaper because they are unsafe and not taxed.

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.

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,” Tyikwe said.