For a country so richly endowed with natural resources and potential, South Africa’s economy should be thriving. Yet it isn’t. The absence of any meaningful growth continues to fuel unemployment, poverty, inequality and crime, all of which are worsened by the government’s tendency to score own goals. One such own goal is National Treasury’s continued insistence on imposing above-inflation increases in excise duties – commonly known as “sin taxes” – a policy that undermines the economy on multiple fronts.
Illicit economy thrives while Treasury loses
First, it allows illicit trade to grow and capture an ever-larger share of the market, resulting in a net loss to the fiscus. As excise duties rise faster than inflation, the pricing gap between legal and illicit products continues to widen, driven mainly by the excise tax paid on legal products.
This is clearly evident in the cigarette market: the cheapest legal pack of 20 cigarettes sells for about R35, while an illicit pack averages just R5. Given that the minimum collectible tax on a legal pack is R26.22 (R3.42 VAT and R22.80 excise duty), it is simply impossible for legal cigarettes to compete.
A similar pattern emerges in the alcohol industry, where illicit alcohol is roughly 37% cheaper than legal products, again primarily driven by the excise duty differential.
These price differentials exist in a country where consumers’ buying power is diminishing. While more and more people lose their jobs and sources of income, food inflation – which hits the poorest the hardest – continues to hover around 5%. These factors allow illicit trade in cigarettes and alcohol to flourish. One in five alcoholic drinks sold in South Africa is now illicit.
While the formal economy struggles to grow by even 1% a year, the illicit alcohol industry has been growing at more than 6% annually since 2017. Three out of every five cigarettes sold today are illicit. In 2009, this figure was one in 20.
The scale of losses to the fiscus is enormous, with estimates from alcohol and cigarettes exceeding R30bn annually, and rising. The annual growth in illicit trade often exceeds the revenue gained from above-inflation excise duty increases. In the cigarette market, excise tax collected in 2019/20 amounted to R14bn, yet by 2024/25 it fell to just R9bn, despite multiple tax hikes.
The result is clear: higher excise duties have become counterproductive, illustrating the principle of the Laffer curve, where excessive taxation can reduce total revenue.
Stifling investment and job creation
Second, above-inflation increases in excise duties undermine investment and job creation. No rational business would invest in a country where its biggest competitor – the illicit market – receives an increasing price advantage each year through higher sin taxes. Furthermore, uncertainty about the size and timing of excise duty increases makes it difficult for businesses to plan for the future or undertake large investments. For any business, uncertainty equals risk, which directly impacts the bottom line.
In a country with more than 12-million unemployed people, we must do everything possible to attract investment, drive growth and create jobs. Legitimate alcohol and cigarette producers have publicly stressed that steep excise duty increases and policy uncertainty are complicating their future investment plans. For example, in a recent presentation to parliament, South African Breweries warned that a potential R4.5bn plant investment is at risk due to the current excise duty policy and the uncertainty surrounding it.
Ours is not a perfect society
The strongest argument in favour of above-inflation excise duty increases is that they are intended to reduce the consumption of alcohol and cigarettes, thereby achieving public health objectives and lowering the social and financial costs associated with these products. We recognise that excise duty is necessary for these purposes. In a perfect world, higher prices would discourage consumption while simultaneously raising revenue for service delivery, infrastructure investment and job creation.
But South Africa is far from a perfect world. Illegal cigarettes and alcohol are widely available and, rather than curtailing consumption, these excessive tax hikes push consumers towards unregulated products. This was particularly evident during the Covid tobacco ban, which saw the illicit tobacco market explode as legal supply was restricted.
Illicit products carry their own health risks, meaning public health objectives may actually be worsened. In practice, rather than creating a win-win scenario of higher revenue and improved health outcomes, above-inflation excise duties have become a net loss, with the only beneficiaries being the illegal trade and its criminal and political backers.
Excessive alcohol and tobacco consumption undeniably has negative social and health consequences, but there are more effective ways to address these issues. Efforts such as public education, community empowerment, youth engagement and promoting healthy lifestyles can achieve the same public health goals without driving people into the hands of criminal networks.
Awareness campaigns and targeted interventions are far more likely to reduce harmful consumption than punitive sin taxes in a society where illicit alternatives are readily available.
Avoiding the own goals
With South Africa’s economy stuttering and our unemployment crisis deepening, it is time to halt the own-goal scoring. The government should aim at the right goal posts, such as creating a tax regime that attracts investment, drives growth, and creates jobs. Limiting excise duty increases to inflation, rather than above it, is one practical way to achieve this. This will ensure that legal businesses can compete while public health objectives are still supported.
Alan Beesley is an ActionSA MP and a member of the standing committee on finance. He is a non-smoker and non-drinker.
Top image: Rawpixel/Currency collage.
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