SARS has a R90 billion leak that it’s struggling to plug

 ·31 May 2023

Illicit trade in South Africa incurs tax losses of nearly R100 billion per year, and prioritising efforts to combat it  – and the restrictive regulations that facilitate it – should be a fiscal imperative.

This is according to the report, Transnational Alliance to Combat Illicit Trade (TRACIT) Organised Crime, Corruption, and Illicit Trade: Spotlight on South Africa, which was recently published by Business Unity South Africa (BUSA).

The report found that South Africa faces challenges from illicit trade on multiple fronts, including but not limited to alcohol, cigarettes, fishing, mining, counterfeit electronics, pharmaceuticals, food, and apparel.

The magnitude of the losses is staggering, as the report cites that the South African Revenue Service (SARS) estimates that illicit trade costs the South African economy R100 billion annually.

It added that, in terms of lost tax revenues, Business Leadership South Africa (BLSA) estimates that the country loses around R250 million per day – equating to R91.25 billion annually.

These estimates align with global authority estimates, with the OECD gauging the losses at between R69 billion and R98 billion a year, or more than 1% of South Africa’s GDP, to illicit financial flows.

According to the report, a primary reason for the rampant trade of illicit goods was the Covid-19 pandemic.

“The pandemic provided wide opportunities for illicit traders to significantly expand their operations as government lockdowns, bans, and other restrictions disrupted markets and created shortages,” said the report.

During the pandemic, two industries saw a notable attack from illicit traders and their counterfeit goods – the alcohol and tobacco markets.

“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,” said the report.

It added that SARS warned that the ban on the sale of alcohol and tobacco products during the COVID-19 lockdown allowed criminal networks to gain a foothold in the market and cautioned that it would take years to reverse the impact – but this was ignored.

Business Leadership South Africa estimated that the tobacco bans during the lockdown cost the government as much as R35 million a day in lost excise and other tax revenues.

According to the report, illicit cigarettes gained 54% of the tobacco market share, and it is estimated that the government lost approximately R6 billion in excise duties on cigarette sales during the 20-week sales ban.

The tobacco company Philip Morris South Africa said illicit trade harms everyone except criminals. Money from illegal trade is also used to fund much more severe criminal activity.

To stem the negative impacts of illicit trade, the government of South Africa has recently taken important steps towards rooting out corruption.

It increased the number of successful cases against serious organised crime and recovered R8.2 billion in revenue from criminal and illicit economic activities in the 2021/2022 financial year.

The government also instituted a new Border Management Authority to strengthen efforts against importing illicit goods into South Africa.

However, it may not be enough to address the growing problem of illicit trade, especially after the growth in illegal alcohol and cigarette trade during the lockdown, the report noted.

“At the structural level, there is not yet a strategic, overarching anti-illicit trade framework with clear leadership responsibilities and accountability to guide the enforcement of existing laws or to coordinate responsibilities between agencies,” it said.

“If anything, this report has demonstrated that more partnership, engagement, and an effective policy response needs to take place,” said Philip Morris.

“It is important to tighten cooperation between enforcement authorities, which will enable identifying equipment, packaging and raw material suppliers to cut off illicit trade at the source,” it added.

“The report highlights valuable lessons, showing that crisis-driven regulations, however well-meaning, can have unintended and long-lasting negative impacts on the economy and society by driving illicit trade.”

A notable example of this is the new tax on vaping products coming into effect on 1 June 2023. This will see nicotine-substitute solutions, including vaping products, being added to the tax net with a flat excise duty rate of R2.90/ml.

However, the new tax has been met with widespread condemnation from the vaping industry, arguing that the tax will do more harm than good – pushing consumers to illicit markets – and jumps the gun as legislation governing vaping products in the country are yet to be promulgated.

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