Striking the right balance is crucial
British American Tobacco South Africa contributed approximately R18.4 billion to the South African fiscus in 2015, which amounted to some 0.52% of the country’s total gross domestic product.
So-called ‘sin taxes’ (such as those on tobacco or alcohol) provide a strong source of funds for governments all around the world, including in South Africa. South Africa’s current tax policy saw British American Tobacco South Africa contribute approximately R14.5 billion to the South African fiscus in 2015.
In addition to providing government revenue, many argue that increasing the cost of cigarettes will act as a deterrent to smokers and potential smokers, making the habit too expensive to maintain. However, it is important to consider whether sudden and steep increases in tobacco excise taxes really cause smokers to quit in their droves, or to cut down drastically.
The short answer is no.
‘Shock’ increases in tobacco taxes often fail in both of these goals as consumers increasingly look towards the black market, and in South Africa, this illegal market already accounts for nearly a quarter of all cigarettes sold in the country – one of the highest in the world.
Not only that, but sometimes governments fail to collect extra tax on shock increases. In some developed countries we have seen tax rates raised to such a high level that tax revenue begins to fall, as smokers seek out cheaper, black market alternatives, which while illegal, are tax free.
We work with the relevant authorities in South Africa to consider this precedent when reviewing excise.
A report jointly commissioned by the tobacco industry in Australia estimated that in the 12 months to June 2015, illicit trade cost the government around $1.42 billion in lost excise revenue. Between 2007 and 2010 the tobacco black market grew from 8.3% to 14.3% of the tobacco sold in the country. The largest annual increase during that period occurred in 2010, the same year as an increase in excise of 25 per cent. We don’t think that’s a coincidence.
Hikes in excise tax may also lead to greater price differences between nearby countries, encouraging tobacco smuggling across borders. Cross-border tobacco smuggling is one of the challenges South Africa faces in fighting illicit trade. In fact, 20% of the illegal trade is still smuggled over our borders, while the balance is manufactured locally.
As a company, we are not against increases in tobacco taxes.
Manageable increments, typically in line with inflation, make the most sense: governments are less likely to inadvertently fuel the illicit trade and tax revenues are more predictable.