Pragmatism needed when considering increasing taxes for tobacco and liquor products

Zinhle Tyikwe, CEO, Consumer Goods Council of South Africa

While the government faces a funding gap of as much as R60 billion, proposing to increase the so-called “sin taxes” is both anti-growth and counterproductive and will simply encourage the already entrenched illicit trade, discourage job-creating investment and continue to cost the government much needed revenue.

By way of context, the illicit market in SA 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 among others and is currently estimated to account for as much as 10% of the SA economy. It is estimated that the South African Revenue Services (SARS) could be losing over R8bn annually from the sale of illicit cigarettes alone.

In the alcohol sector, it is estimated that the value of the illicit alcohol market alone is R20.5 billion—22% of market share—resulting in a R11.3 billion annual loss to the fiscus (2022 figures).

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 the fact that some people would have reduced their 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 (2022 prices) in excise and VAT revenue.

With such an entrenched illicit market, whose growth was fuelled by Covid-19 restrictions on liquor and tobacco sales, an increase in taxes while impacting on the price of legitimately sold products, will drive consumption to the illicit market where the selling prices are unaffected.

Smokers and drinkers will switch to cheaper, illicit or counterfeit brands, further denying National Treasury much-needed revenue to balance the budget.

Treasury argues that higher alcohol taxes will reduce consumption and address social costs; however, the proposed increases in excise tax on alcohol and VAT threatens 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 simply opt for alternative sources, such as illicit alcohol.

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%–80% for wine, 20% for beer, and CPI+4% for spirits—would ripple through the entire alcohol value chain, jeopardizing this ecosystem, and disproportionately impacting 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 (on which the required taxes have been paid), and illicit products on which taxes are not paid. Illicit cigarettes are selling for as little as R5 for a box of 20, while 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 large price difference between legal and illicit products, and in the context of severe financial pressure on consumers over several years, legal cigarettes are becoming less affordable to consumers, who continue to migrate to the illicit cigarette market at an alarming rate.

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 endangers public health and also destabilises legitimate businesses and community well-being.

There is need to strengthen regulatory enforcement and launch comprehensive public awareness campaigns about the dangers of unregulated alcohol and tobacco products.

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

Finally, government should capacitate SARS to enable it to collect outstanding tax revenues which it estimated at R800 billion.

Treasury must reassess its proposed tax increases through meaningful consultation with industry stakeholders.

Decisions with far-reaching consequences should be made transparently, with the evidence supporting them shared with the industry.

Collaboration is essential to create a balanced tax framework to stimulate economic growth and combat illicit trade.

Such an approach would directly support the inclusive socio-economic development objectives outlined in the 2025 State of the Nation Address.