JOHANNESBURG – Economic consultancy firm Econometrix warned the Treasury yesterday against increasing excise tax as this would lead to South Africa further haemorrhaging billions in lost revenue.
The company said that recent excise rises combined with rampant illegal cigarette trade had seen the South African Revenue Service (Sars) miss its targets.
Econometrix, in a study commissioned by British American Tobacco South Africa (Batsa), said tobacco excise revenue has dropped R1.94 billion in two years, despite successive increases in tax rates.
Dr Azar Jammine, the chief economist at Econometrix, said yesterday that the government had been raising excise taxes every year for several years now, but in recent years, this had not resulted in more money for the fiscus.
“Treasury’s estimation of tobacco excise tax income has also been significantly off for the past two years. The gap between expected and real tobacco excise income was an astounding R1.65bn in 2016/17, which increased to R1.71bn in 2017/18,” said Jammine.
“Considering the high price elasticity for tobacco products, holding excise at current levels is the only way to prevent further erosion of the tax base, while enforcement measures are implemented to curb the illicit tobacco trade.”
The excise tax in South Africa is levied as a uniform specific tax. The National Treasury has consistently increased tobacco excise taxes, which fall under sin taxes in the past years.
The last hike came last year, with the price of a packet of cigarettes going up 8.5 percent, with the taxes increasing from R14.30 per pack of 20 to R15.52 – a tax that sellers pass on to the consumer.
Jammine said based on the same price elasticity of demand, he estimated that holding tobacco excise taxes in 2019/20 would result in the same excise collection as anticipated for the current financial year. He argued that, by contrast, the Treasury would lose R1.1bn more revenue from Batsa alone than if excise was increased by expected inflation of 5.4 percent and manufacturers passed on the increase to consumers – because consumers switched to illegal cigarettes.
However, Tertius Troost, a senior tax consultant at Mazars, said he did not agree that holding excise at current levels was the only way to prevent further erosion of the tax base.
“In order to prevent further erosion, there should be better policing of the illicit tobacco trade economy. This does, however, come at a cost, and therefore the cost versus the benefit must be weighed up,” Troost said.
“Generally, it has been reported that approximately R7bn to R8bn of tax revenue is lost due to the illicit economy. Therefore if it costs the fiscus R1bn to police, and they do a good job, they can still collect a large sum of tax revenue.”
BAT is the dominant cigarette producer and distributor in South Africa.