Excise revenue on tobacco, beer and spirits dropped R3.7bn in the first half of financial 2024, even though collections improved post-Covid — and alcohol and cigarette manufacturers blame the proliferation of illicit products and counterfeit goods.
“While collections in spirits excise duties have recovered well compared to levels in 2019/2020, collections over the first half of 2023/24 were also 12.4% lower compared to the same period in 2022/23. Beer and wine collections have grown by 2.1% and 9.7% respectively over the same period,” according to the National Treasury.
This trend continues tobacco's poor performance in recent years, with collections close to 47% lower than in 2019/2020. This comes amid lower-than-expected revenue collections of R20.5bn, said the Treasury's review for the 2023 budget.
“The downward revision largely reflects poor performance in cigarettes and pipe tobacco products collections. Compared to the first half of the 2022/2023 fiscal year, collections over the same period in 2023/2024 were 20% lower,” it added.
Companies in these sectors said they have not recovered from the lockdown ban as the problem of illicit producers, tax dodgers and counterfeit goods worsens.
“The ban was not based on any evidence. South Africa is the only country in the world that did this. It did not have the desired impact and ... turned the whole market into an illicit market, and it is a long road back,” said the director of external affairs at Philip Morris South Africa, Ulreich Tromp.
Before the tobacco ban, illicit trade accounted for 35% of the South African market, but its share is now 50%-60%, he added.
“I would say that if the level is as high as is claimed, the legal industry today is only able to compete for a share of whatever is not illicit. Theoretically, 100% of the market should be available to legal players, but now we can’t compete on an equal footing.
“The introduction [by the South African Revenue Service] of CCTV cameras at all cigarette manufacturing facilities and tamper-proof volume counters on cigarette production lines at all cigarette factories in South Africa are some of the measures that will assist the government to have better control on the volume of cigarettes being manufactured locally. These measures should be implemented without delay,” he said, adding that Phillip Morris appreciated Sars's efforts.
The market share of illicit tobacco after the Covid ban on cigarettes
— IN NUMBERS: 50-60%
In October, Sars also clamped down on abuse of duty-free privileges by some diplomats who were buying tobacco and alcohol and reselling it at a mark-up, costing the fiscus an estimated R100m a month.
Diageo corporate relations director Sibani Mngadi said the biggest problem facing South African spirit companies is illicit trade growth, with excise duty not being paid and counterfeit producers refilling used branded bottles with ethanol.
“Euromonitor estimates that illicit spirits were already constituting 30% of the total spirit market. It’s a sector that is highly lucrative and the illicit traders have advanced their supply chains and route to market since Covid-19 alcohol trade bans.
“One of the factors is spirit taxes are higher than the taxes on beer and wine. Using a like-for-like calculation of per litre of pure alcohol, beer products pay R127 and spirits will be double that at R257,” he said.
When times are tough financially, as they are now, people will generally switch from spirits to more affordable products such as beer or wine. The result was seen in the medium-term budget policy statement, which reflected a R3.7bn shortfall in sin taxes, Mngadi added.
“On the alcohol side, beer is 2% above what was projected in the February budget speech, while wine is up 9%. The spirits category is down 13% from anticipated excise tax contribution.”
He said Diageo had appealed to the National Treasury not to hike excise taxes even higher to compensate for the category’s underperformance, as higher prices will further suppress the legitimate, tax-compliant market.
Johnny Moloto, head of external affairs for British American Tobacco Sub-Saharan Africa (Batsa), said the group estimates that up to 70% of the cigarettes sold in South Africa were illicit, making the country one of the biggest markets for illegal cigarettes in the world.
“The biggest loser from the illicit tobacco trade is Sars and, indeed, South Africans and the economy as a whole,” he said, estimating that the illegal trade cost the country more than R20bn in excise revenue every year.
The impact of the Covid sales ban was still being felt by Batsa, which had experienced a volume decrease of about 40% since 2019. These volumes had yet to recover, Moloto added.
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