Tax changes planned for cigarettes and alcohol in South Africa – but they could come at a cost

In its February 2021 budget, the Treasury announced an 8% increase in excise duties on alcohol and tobacco.

This increase in excise duties seemed to be motivated by a desire to increase government revenue, after a year in which the economy – and government coffers – were hit hard by the Covid-19 crisis, explains Virusha Subban , partner and head of indirect taxation at Baker McKenzie Johannesburg. ,

At the same time, the Treasury announced its intention to change its excise policy on cigarettes and alcohol.

“In particular, the Treasury has indicated that it plans to levy higher excise taxes on cigarettes and alcohol in the future,” Subban said.

“In his budget statement, Finance Minister Tito Mboweni said the government will review so-called” sin taxes “as part of the country’s public health program, to reduce consumption through retail prices. higher.”

Current excise policy limits excise to 40% of the retail price of the most popular price category of cigarettes.

The targeted incidence of excise duties for spirits is 36%, that of beer 23% and that of wine 11%.

Taxed to Custody

Over the past two years, the Treasury has set excise outside the prescribed limits of its own excise policy, Subban said.

“For example, before the February budget, excise duty on cigarettes was 43.5% of the retail price, which is apparently ultra vires the government’s own excise policy.

“The 8% increase in excise duties brought the incidence of the most popular category of cigarettes to 45%.”

Responsibility for advising on tax policy and designing new tax legislation rests with the Minister of Finance, in close collaboration with the Treasury.

But there has to be a proper consultation process where the voices of businesses and their customers are invited to be heard, Subban said.

Both the Constitutional Court and the Supreme Court of Appeal state that policymakers have a constitutional obligation to facilitate public participation in tax law and the policy-making process.

It is imperative to consult with alcohol and tobacco manufacturers at an early stage in the ongoing review of excise tax policy, Subban said.

“But, as it stands, no announcement has been made on how the consultation process will unfold, what it will involve and how long it will take.

“In view of the country’s constitutional obligations and its objective of strengthening the technical capacities of fiscal policy, it is important that the Treasury presents clear and transparent consultation plans on excise policy as soon as possible, so that all interested parties can make an appropriate contribution. . “

This is especially important given recent developments in the legal alcohol and tobacco industries, she said.

Walk carefully

The alcohol and tobacco industries were both severely affected by government policy during the pandemic.

During the 2020 national lockdown, the government imposed an unprecedented total ban on the alcohol trade from late March to early June, with new restrictions in place for the remainder of 2020.

Cigarette sales were banned between March and August.

This has resulted in a drastic drop in legal sales of these products, a corresponding drop in tax revenues and a rapid increase in the consumption of fraudulent and illicit alternatives.

According to the University of Cape Town, the illicit cigarette market grew 104% during the lockdown period.

And a recent IPSOS study shows that over 60% of cigarettes consumed in South Africa are now illicit, up 33% from before the sales ban.

As a result, in fiscal year 2020/21, excise duties on legal cigarettes were 60% lower than the R14.46 billion the Treasury expected to collect.

The alcohol industry has also reported significant losses. The South African Association of Alcohol Brand Owners said the sales bans cost the legal alcohol industry R 36 billion in lost revenue and the Treasury R 29 billion in tax revenue lost.

They also estimate that 15% of the alcohol market has continued to operate illegally, without paying taxes.

“There are signs that the illicit commodity supply chain has gained significant traction, as more sophisticated distribution models were formed during the sales bans.

“Even after the sales restrictions were lifted, consumption of alcohol and fraudulent tobacco products was higher than it was before Covid,” Subban said.

He further warned that tax changes could lead to other costs, including the expulsion of businesses from the country.

“We must not forget the contributions made to the history of this country by these industries, from job creation to tax contributions and innovation in their respective areas.

“Let’s not give multinationals a reason to leave a country where illegal business practices are becoming the norm. “

Read: Level 4 lockdown expected to last much longer than just two weeks in South Africa: analyst

About Mitchel McMillan

Check Also

Milton officials propose property tax hike in 2023 budget

Milton residents could see a property tax increase as part of the fiscal year 2023 …