Revenue collections from taxes on cigarettes have declined sharply, in spite of successive rate hikes, South Africa’s top independent economists have found.
Using official National Treasury data, Dr Azar Jammine, director and chief economist at Econometrix, found that income from tobacco excise declined by R1.94 billion between 2015/16 and 2017/18.
Treasury’s estimation of tobacco excise tax income has also been significantly off for the past two years. The gap between expected and real tobacco excise income was as much as R1.65 billion in 2016/17, which increased to R1.71 billion in 2017/18.
“The government has been raising excise taxes every year for several years now, but in recent years, this has not resulted in more money for the fiscus. Instead, while excise tax has been raised, Treasury income from this tax has been declining,” Jammine said.
The economist said that this did not mean that fewer people are smoking or that people are smoking less.
Total consumption and smoking incidence are on the rise in South Africa, leading to a unique situation in which smoking increases, but government revenue from smoking decreases.
This defeats the intended purpose of the tax policy, which is, officially, to discourage smoking while collecting revenue, he said.
According to Econometrix’s report, the price elasticity of cigarettes is a significant factor in explaining this.
“As the cost of cigarettes increases – due mainly to the excise taxes being raised each year – consumers are not giving up smoking, but instead simply switching to cheaper products which yield no tax at all,” said Jammine.
Econometrix’s research, which was commissioned by British American Tobacco South Africa (BATSA), is borne out of separate research conducted by Ipsos in 2018.
The study found that the top-selling cigarette in South Africa is RG, a brand that regularly sells for R10 per pack of 20. This is significantly less than the R17.85 minimum tax owed on a pack of 20.
Cigarettes selling below this minimum price were found in 3 out of 4 non-organised shops by Ipsos researchers, totalling 100,000 outlets, and these shops account for almost 80% of all tobacco sales.
The Ipsos study found that 42% of all cigarette sales in these shops are below the minimum tax owed per pack.
“Considering the high price elasticity for tobacco products, holding excise at current levels is the only way to prevent further erosion of the tax base, while enforcement measures are implemented to curb the illicit tobacco trade,” Jammine said.
“Based on the same price elasticity of demand, we estimate that holding tobacco excise taxes in 2019/20 would result in the same excise collection as is anticipated for the current financial year.
“By contrast, Treasury will lose R1.1 billion more revenue from BATSA alone than if excise is increased by expected inflation of 5.4% and manufacturers pass on the increase to consumers – because consumers switch to illegal cigarettes,” said Jammine, based on Econometrix’s econometric modelling.
The drop in sales volumes of excise-paid products has resulted in a significant loss of revenue for the national fiscus, as consumers move to cheaper illicit products.
According to Econometrix, the revenue maximisation point for tobacco excise tax has been crossed – and further increases in excise tax will only result in further drops in actual revenue collected.
Annual increase in excise duty collections on cigarettes – estimated vs actual collections: