The new excise duty imposed on vaping products as of 1 June 2023 has already started to have a devastating effect on vape retailers, and some warn that the tax will only cause more harm than good.
The inclusion of an excise tax on vaping tobacco products has been in the works for some time now, with the initial announcement made during finance minister Enoch Godongwana’s budget speech in 2022.
The South African Revenue Service (SARS) has confirmed that the necessary amendments have been made to the Tobacco Product Excise forms to accommodate vaping products, and the tax was rolled out last week on 1 June 2023.
The flat excise duty rate for e-cigarettes is R2.90 per millilitre. Manufacturers were also required to apply for licenses for their manufacturing premises specifically for these products from SARS before 1 June – needing to submit their first excise duty account by 28 July 2023.
However, this new tax faced widespread criticism from the vaping industry. Opponents argue that the tax will have adverse effects, such as driving consumers towards illicit markets. They also believe that implementing the tax is premature since legislation governing vaping products in the country has not yet been officially enacted.
According to Vaperite managing director Barry Buchman, the excise tax of R2.90 per ml (plus the VAT on the R2.90 per ml) is a complete overreach by National Treasury (NT).
Along with the massive increase in cost for both the retailer, manufacturer, and consumer – Buchman argued that the tax goes against the NT’s health claims and will only exacerbate the so-called “vaping epidemic” while killing many businesses in the process.
According to Buchman, the tax will only push cashed-strapped vaping consumers to purchase the highest and most addictive nicotine-content e-liquid, as it would be cheaper.
“A 30ml bottle of highly addictive nicotine salt e-liquid, usually at a 2% to 5% strength, lasts around 15 days, and the tax is R87 plus VAT on top of current prices of around R180 per bottle. This takes the new price to R280 per bottle,” said Buchman.
“In comparison, A 100ml bottle of nicotine-free or marginally addictive levels of baseline nicotine e-liquid, at strengths ranging from zero to .06% – which also lasts around 15 days – incur a tax of R290 plus VAT on top of the current price of R280 per bottle.
“This takes the new price to R613.50 per bottle, an over 100% increase,” he added.
This means that low nicotine level e-liquid will be prohibitively expensive, and current users of vape products will start transitioning over to far higher strength and far more addictive nicotine salt e-liquid to get the same fix at a far lower cost.
Of more concern is that they might return to deadly combustible cigarettes, which are far less expensive than vaping and readily available from legitimate retailers and the black market.
This tax will also make it a lot easier for underage users of vape products to buy them from illicit retailers, whereas current retailers have a self-implemented no-under-18 age limit on vape sales.
As legitimate retailers close their doors, more illicit retailers will pop up and who they sell to will be the least of their concerns.
Consumers may not have to take the full brunt of the price increase
According to Buchman, the industry is looking at various initiatives to soften consumer impact, and consultations are ongoing.
Many retailers bulked up on e-liquid before the implementation date of the tax and will be able to maintain current pricing for some time.
According to retailers such as Vaperite and Sir Vape, the tax only allies to imported and manufactured e-liquids produced after the implemented date, which means all prior stock can be sold at the current prices, which does not include the tax.
However, once this stock starts running out, consumers can expect gradual price increases to allow retailers to maintain the same margins as before the tax, said Buchman.
This could mean that price increases of around 100% are still very possible.
What must be noted is that the vape industry is very young and immature, and there has been a massive downward trend in e-liquid prices over the last few years. The consumer has been spoilt by this “race to the bottom” on e-liquid pricing, and prices should level off close to where they were previously, added Buchman.
Devastating effects on vape retailers
According to Buchman, the tax has already started to have a devastating effect on vape retailers.
“A retail chain with 15 retail outlets closed all 15 retail locations on 31 May. A few of the e-liquid manufacturers have also closed. This was a direct result of the tax making their business model unviable,” he said.
Concerningly, he added that the company expects up to 50% of current retailers and possibly a higher number of e-liquid manufacturers to be out of business by the end of this year.
“The black market will pick up the slack, and e-liquid of questionable quality and source will be readily available to anyone willing to visit one of the countless flea markets where many illicit vape sales take place, as well as the many private channels available within a black market,” said Buchman.
Buchman also noted that the main driver of the tax was the primary concern over the use of vape products by the youth, the so-called “vaping epidemic”.
However, Buchman said that the industry – under the Vapour Products Association (VPASA) – already has strict measures in place to avoid selling to anyone under the age of 18, but unfortunately, many non-VPASA retailers do not, and the illicit market doesn’t care who they sell to.
He added that Vaperite would welcome working with NT and the Department of Health to explore their ideas for a youth-free e-liquid market in South Africa. He would even be willing to create a public/private partnership to implement and monitor the system – because this current tax is unsustainable.