In a recent media briefing, international relations & co-operation minister Ronald Lamola gave a G20 Presidency progress report titled “Five months of purposeful leadership”, in which he detailed the critical issues being addressed across the various working groups — including but not limited to pursing enhanced international tax cooperation and addressing illicit financial flows; and ensuring trade policies actively support sustainable development objectives.
These critical G20 sherpa working group's focus areas offer inspiration for South Africa to deal with illicit trade and illicit financial flows which have kept the country in the Financial Action Task Force (FATF) grey list. This, despite a more positive FATF statement in February which announced: “South Africa is now deemed to have addressed or largely addressed 20 of the 22 action items in its Action Plan, leaving two items to be addressed in the next reporting period that runs from March to June 2025.”
South Africa is now deemed to have addressed or largely addressed 20 of the 22 action items in its Action Plan, leaving two items to be addressed in the next reporting period that runs from March 2025 to June 2025.
Business Unity South Africa in May launched the latest Transnational Alliance to Combat Illicit Trade report, which found illicit trade as one of the biggest threats to stability and economic growth in the country. The report covered various sectors which continue to be vulnerable to illicit trade, and the tobacco industry seemed to have experienced the most pronounced worsening of illicit outcomes.
Below are listed a few key areas that the private and public sector parties can focus on to ensure the country doesn’t continue to suffer fools to players who are unable to take a systems view to reform against illicit trade and illicit financial flows in the sector.
• Track, trace and plug your economic losses: While informality supports livelihoods, it also poses challenges such as reduced tax revenues, consumer safety risks, and the proliferation of illicit trade. Sars estimates that in 2012, the size of the illicit cigarette market was about 10% of the total market; and by 2021, the estimated size of the illicit cigarette market was approximately 60%.
The current Tobacco Products and Electronic Delivery Systems Control Bill under consideration at Nwdlac risks being moot and ineffectual if it does not effectively address the growth of the illicit market running unabated. There must be an increased emphasis on the drafting and or improvement of regulations and laws about illicit cigarettes, and investment in tracking technology and innovation for manufacturing input certification and postproduction traceability.
Kenya provides evidence that this can work. In 2013, the country implemented the Excisable Goods Management System (EGMS), essentially a digital tax stamp and track-and-trace system for tobacco (and later alcohol) products. Under EGMS, all cigarette packs are affixed with secure, traceable stamps containing encrypted codes, and manufacturers must report production electronically to the Kenyan Revenue Authority.
• Perspectives on the Laffer Curve for the sector: The Laffer Curve theorises that there is an optimal tax rate that maximises government revenue, beyond which point, increases in tax rates will likely lead to diminishing returns or even revenue losses. In the case of excise taxes on cigarettes, the curve helps policymakers balance between raising excise revenues, reducing smoking for public health promotion and avoiding unintended consequences like the growth in illicit trade we have observed over the years.
Excise taxes and VAT make up more than 50% of the retail price of legal cigarettes, with a high price elasticity (meaning that consumers will readily shift to cheaper and sometimes illicit alternatives when legally prescribed prices rise), suggesting that South Africa is likely past the peak of the Laffer Curve for the legal cigarette industry.
• Risk-based taxation: The one-size-fits-all regulation weakens differentiation between combustibles vs non-combustibles despite differing health risks. Uniform tax and regulatory treatment inherently disincentivises cessation — the transition to less harmful alternatives as proposed in article 14 of the World Health Organisation’s Framework Convention on Tobacco Control.
Simply, the proposals must suggest tiered taxation, where:
1) combustibles attract the highest level of tax;
2) Heat-not-burn and nicotine pouches attract a medium level of excise taxation; and
3) E-cigarettes/vapes may either be exempt where there's no nicotine or attract lower levels of taxation.
Without these reforms, the licit tobacco industry will shrink, illicit trade will thrive as it has over the last decade, and public health promotion goals will stall. Sars and SAPS enforcement capabilities have not scaled with the illicit trade explosion and budget and other capacity building provisions need to be made if we are to combat illicit trade.
• Skenjana is an economist and MD of ESG Analytics
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