Budget sees tobacco industry’s hopes of recovery go up in smoke – Fita, Batsa

The industry’s hopes of a healthy bottom line went up in smoke on Wednesday when finance minister Tito Mboweni announced an 8 percent increase on excise duties. 

This includes tax collection from the alcohol industry as well.  

Mboweni tabled his budget before the National Assembly, joined by President Cyril Ramaphosa, National Treasury officials and South African Revenue Services (Sars) commissioner Edward Kieswetter.  

He told members of Parliament that they would also have to pay more for their sins, effective immediately. 

Excise tax expert from the University of Cape Town, professor Corne Van Walbeek, says the dramatic increase in excise duties is motivated by a pro-health approach. 

“If one looks at medical studies that have investigated the high causes of death and so on, we see that both tobacco and alcohol are very, very high contributors to premature death in South Africa. That has been known for years.  

“An increase of 8 percent in the excise taxes is relatively steep and of course to some extent, unexpected. Of course, the alcohol and tobacco industries will be most upset by this and possibly by the comment the minister made about the fact that he’s increasing the excise tax on alcohol especially, because of public health reasons.” 

Van Walbeek adds there is a possibility that the decision could drive up sales in the illicit market.  

But he adds it’s not a solid science. 

“If you were to ask this from the tobacco industry, the answer of course would be ‘yes’. However, if one looks at the evidence more objectively and from a less interested perspective, the answer is not obvious. 

“Many countries have been able to successfully increase excise taxes without there being an increase in the illicit trade and at the same time, the countries where the excise taxes are low, illicit trade is a problem. 

“In the case of South Africa, over the past 10 years the excise tax in real terms hasn’t changed all the much but we’ve had a big problem of illicit trade and the main reason for that is not because of the tax but because a lack of enforcement,” he explains.  

Van Walbeek remains optimistic that Sars is making headway in tightening controls against the black market. 

Listen to Van Walbeek below: 

The Fair-Trade Independent Tobacco Association (Fita) says it sympathises with government’s pro-health rationale, but fears the blow to the consumer’s pocket will be enough for them to turn to non-compliance.   

“The consumers are going to feel the burden of this because manufacturers will have to factor the increase into their costing and we’re going to see the rise in the prices of legitimate cigarettes in South Africa,” says Fita chairperson Sinenhlanhla Mnguni.

“The knock-on effect, of course, is that the consumer that is more accustomed to illicit cigarettes which sell for far cheaper because they do not pay the requisite taxes will be shifting to these products.”

He believes the sin tax increase will set the industry’s economy back by billions.  

Mnguni adds Sars and other law enforcement agencies will have to be at their best to beat criminals to the punch. 

Listen to Mnguni below:

General manager of British American Tobacco South Africa (Batsa) Johnny Moloto believes government missed the mark. 

“Taxes are only paid by lawful people.  This huge increase will further stoke the illicit market and will undoubtedly result in falling tax revenues for government, while illegal players increase their profits and become even more deeply entrenched,” says Moloto.  

“By radically departing from its planned excise policy, government is only compounding the losses incurred as a result of its previous mistakes.” 

He adds government played into the hands of crime syndicates.  

“More money will be diverted away from legitimate, tax-paying businesses, further reducing the government’s own revenue. Meanwhile, more money will go to organised crime syndicates to fund all sorts of other anti-social activity, from drug-trafficking to gang warfare. In a year marked by costly mistakes, this could be the costliest of them all.

“It is a gift to the syndicates in the illegal market whilst destroying the legal tobacco market.  If the illegal cigarette barons were given the opportunity to write government policy, this is exactly what they would do.” 

Read Batsa's full statement below: