Industry rails against sin taxes as illicit markets undercut legal producers

Frustration over South Africa’s growing illicit tobacco and alcohol markets boiled over in Parliament on Wednesday as industry stakeholders warned that legal businesses are losing ground to smugglers and counterfeit operators, while National Treasury and the South African Revenue Service (SARS) defended their decision to maintain inflation-linked excise duty increases.

During hearings on the Taxation Laws Amendment Bill (TLAB), Tax Administration Laws Amendment Bill (TALAB) and Draft Rates and Monetary Amounts Bill, business groups argued that the government has spent years acknowledging the illicit trade problem without delivering sufficient enforcement action, while legitimate manufacturers continue to shoulder rising tax burdens and intensify competition from illegal products.

Treasury and SARS responded with a package of refinements to the draft legislation while insisting that stronger enforcement, rather than lower excise taxes, remains the appropriate response to the growing threat.

Treasury defends excise strategy

Treasury maintained that limiting annual excise duty increases on tobacco and alcohol products to inflation-linked adjustments remains the appropriate policy response despite industry concerns about illicit trade.

Stakeholders from the tobacco sector argued that every excise increase widens the price gap between legal and illegal cigarettes, as illicit operators do not pass on tax increases. Industry representatives said legal cigarette manufacturers face a tax burden of more than R27 per pack, while illicit products continue to sell for between R5 and R20.

Read more: Zero alcohol laws need more than political resolve

Treasury acknowledged the concern and noted that tobacco excise increases have been restricted to inflationary adjustments since 2023 largely because of the illicit trade problem.

Alcohol producers similarly welcomed the move away from above-inflation increases but urged the government to consider a multi-year excise framework to improve predictability for investors and manufacturers.

April excise date confirmed

A major outcome of the hearings was confirmation that the government intends to move annual excise duty implementation from Budget Day to April 1.

Treasury officials said amendments to customs and excise legislation will empower the Finance Minister to implement future excise changes through the annual Rates Bill, giving producers greater certainty and more time to prepare for tax adjustments.

Industry groups welcomed the change, arguing that annual Budget Day adjustments create operational and planning difficulties.

Illicit trade takes centre stage

The issue of illicit trade overshadowed virtually every excise-related discussion.

Finance Committee Chairperson Joe Maswanganyi warned that counterfeit goods and smuggling operations are causing widespread damage to legitimate businesses, reducing tax collection and undermining economic growth.

**Read more: **Alcohol is quietly destroying our communities

He announced plans for dedicated parliamentary hearings next year involving SARS, law-enforcement agencies, intelligence structures and affected industries.

Maswanganyi described illicit trade as both an economic and national security threat.

“If people can manage to smuggle goods into the country illegally, next time they will smuggle weapons,” he warned, calling for concrete action plans rather than continued discussion.

SARS promises track-and-trace progress

Responding to concerns from industry, SARS said significant progress is expected on its long-awaited track-and-trace system for tobacco products.

Officials indicated that announcements on the programme would be made within weeks and that SARS expects to go to market for a solution during the second quarter of the next financial year.

The system is expected to play a key role in combating illicit tobacco trade by improving monitoring of production, movement and tax compliance throughout the supply chain.

Major tax concessions accepted

The consultation process resulted in several significant changes to the tax package.

Among the most notable was Treasury’s decision to withdraw a proposal limiting donations tax exemptions where spouses cease South African tax residency.

**Read more: **Illicit alcohol costs SA R16.5bn in lost taxes threatening 250K jobs

Officials said consultations found no evidence of widespread tax avoidance and concluded that existing capital gains tax provisions already create an effective exit charge.

Treasury also retained inflation-linked increases in medical tax credits, arguing that lower-income taxpayers benefit disproportionately from the credits and noting that no inflation adjustments had been made during the previous two budgets.

Retirement and business tax changes

Treasury confirmed support for reforms affecting retirement products, allowing holders of multiple small living annuities to aggregate investments and withdraw lump sums where values remain below specified thresholds.

In the corporate tax sphere, government secured broad support for new domestic transfer-pricing rules aimed at preventing profit shifting into Special Economic Zones (SEZs).

Following stakeholder feedback, Treasury agreed to integrate domestic and international transfer-pricing rules while introducing corresponding adjustments to prevent double taxation.

Officials also confirmed that transactions below R100 million would remain exempt from extensive transfer-pricing documentation requirements.

VAT and carbon tax reforms

Treasury retained proposals aimed at closing VAT leakages associated with leasehold improvements made to properties owned by non-VAT vendors, although SARS said it would develop administrative processes to simplify compliance.

The government also confirmed that digital platforms will generally become the default entities responsible for collecting and remitting VAT on transactions conducted through their systems.

On carbon tax, Treasury accepted calls to allow companies to claim refunds annually rather than waiting for the end of a full carbon-budget cycle. Officials said the concession would improve cash flow and reduce delays in recovering overpaid carbon taxes.

SARS softens compliance measures

SARS announced several modifications to administrative proposals following stakeholder feedback.

Among the most important was a decision to introduce a one-month grace period before tougher provisional tax underestimation penalties take effect where taxpayers submit estimates but fail to make payment.

The revenue service also dropped plans for retrospective implementation of certain provisions and confirmed that taxpayers using the Voluntary Disclosure Programme (VDP) will gain access to interest-remission provisions previously unavailable through the framework.

However, SARS rejected calls for automatic interest discounts for non-compliant taxpayers, arguing that such measures would unfairly favour tax defaulters over compliant taxpayers.

New refund screening system

SARS also proposed a new pre-payment screening process for tax refunds.

Under the system, banks would assess refund payments using their existing risk-detection mechanisms before funds are released to taxpayers. SARS said the reform merely changes the timing of an existing process and is aimed at improving fraud detection.

The revenue service rejected calls to define “reasonable suspicion” in legislation, arguing that the concept has operated effectively for more than a decade.

Broad support for consultation process

Despite disagreements on several policy issues, tax professionals and industry groups broadly praised Treasury and SARS for engaging extensively with stakeholders and incorporating public feedback into revised proposals.

The revised tax bills are expected to be tabled alongside the Medium-Term Budget Policy Statement before undergoing another round of public consultation.

Subscribe To Our Newsletter