Illicit tobacco sales a drag on excise tax collections

The South African Revenue Service (Sars) says lower-than-expected collections were received from cigarettes compared to other excise products for the 2024 fiscal year. 

Total revenue collected from specific excise duties – described as duties imposed on certain goods based on quantity rather than value (alcoholic beverages, tobacco products, and fuel and petroleum products) – of R53 552 million represented a shortfall of R420 million. 

Tax revenue from cigarettes was R0.8 billion lower (down 8.4%), spirits R0.2 billion lower (down 1.6%), and petroleum significantly lower by R0.1 billion (10.3%).

This was however offset by higher collections from beer which rose by R0.2 billion (up 1%). 

This is according to Sars’s annual report published on Tuesday along with the 2024 tax revenue statistics. The taxman collected R1.855 trillion in the fiscal year through March – almost R9 billion more than National Treasury’s revised estimate of R1.846 trillion in its 12 March budget.

The report found that excise collection from cigarettes was harmed because of illicit trade, fuelled by the cigarette ban during the Covid-19 pandemic.

Lower collections against spirits was due to consumer behaviour shifting toward ready-to-drink and non-alcohol items, which attract lower excise duties. 

ALSO READ: South Africans smoked 37 billion cigarettes in 2023, but only 13 billion were taxed

“To our concern, the product that grew at unexpected levels – underperforming in its growth – was tobacco,” said Dr Johnstone Makhubu, Sars deputy commissioner for taxpayer engagement and operations, speaking at a media briefing. 

“We remain worried about developments in the tobacco industry. We will use the additional revenue we are receiving [from National Treasury] to focus on ensuring that we collect that tax revenue.”

In the reworked budget for 2025, Minister of Finance Enoch Godongwana revealed that Sars will receive R4 billion more than planned over the next three years. This will increase its overall allocation from National Treasury to R7.5 billion over this period.

A study by Oxford Economics has found that South Africa lost R27.1 billion in tax revenue due to illicit cigarettes in 2022, while tax lobby group Tax Justice SA says its analysis found that more than R20 billion in tax revenue was lost last year due to the illegal tobacco trade.

ALSO READ: Sars loses R119 billion in tax revenue due to illicit cigarette sales since 2002

We ‘will implement CCTV systems’ at tobacco facilities – Kieswetter

Sars Commissioner Edward Kieswetter emphasised that the revenue service remains committed to working with both local and international law enforcement agencies to combat the illicit trade of cigarettes and gold – both key channels for money laundering.

“A contentious issue remains the daily monitoring of licensed tobacco manufacturers,” he said.

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“Despite resistance from some industry players, we will continue to implement advanced solutions, including smart technologies and CCTV systems, to enhance oversight at tobacco manufacturing facilities, despite the significant resistance by some industry players.”

Last year tobacco manufacturers took Sars to court to prevent it implementing a new rule requiring them to install CCTV equipment in their warehouses as a way to monitor production and rein in galloping tax leakage. 

Sars was interdicted in May 2024 and this year the Supreme Court of Appeal dismissed Sars’s bid to overturn the interdict blocking the move.

“We are appealing the current judgment against the use of CCTV implementation,” said Kieswetter. 

“This approach will extend to other areas of abuse and criminality,” he added. 

ALSO READ: Tobacco industry challenges Sars over new surveillance rule

Cracking down on illicit trade and tax defaulters, Sars says its Compliance Programme generated R301.5 billion in compliance revenue, marking a 15.8% year-on-year increase. 

The programme uses data, artificial intelligence and machine learning algorithms to successfully counter criminality and wilful non-compliance.

Sources of ‘compliance revenue’ included R30 billion from syndicated crime, R165 billion from illicit activities, R33 billion from state capture activities – with R94 billion recovered through the resolution of over 3.7 million outstanding debt cases, among other sources. 

“The broad rise in revenue can be attributed to enhanced strategies and the diligent implementation of compliance measures,” says Kieswetter. 

This article was republished from Moneyweb. Read the original here.