Can South Africa afford to lose R85 billion in tax revenues?
Recovering the R85.6 billion in tax losses from to the illicit cigarette trade should be a priority for the finance minister in order to increase tax revenues.
The national budget is to be presented to the nation on 25 February, and as taxpayers and citizens of South Africa we are all wondering what measures the Minister of Finance Enoch Godongwana (the minister) will propose to raise more tax revenues and the tax relief measures that will be granted to cash strapped taxpayers in 2026. In recent times, the minister has been heavily reliant on the South African Revenue Service (SARS) collecting more taxes through its constantly improving efficiency and collection drive. Similarly, there have been no inflationary adjustments to individual taxpayers’ tax brackets and rebates. From 2025, pension withdrawals due to the two-pot withdrawals also contributed to increased tax collections. Besides these three avenues, where else can the minister look to raise tax revenues in 2026?
In the Minister of Finance’s written reply to Parliament in 2025, he confirmed that up to 70% of cigarettes sold in South Africa are illicit and result in annual tax revenue losses of over R27 billion. According to Oxford Economics’ report of 2023 titled, The Impact of the Tobacco Industry in South Africa[1], the potential cumulative taxes evaded due to illicit trade in cigarettes during 2019 to 2022 is estimated at R85.6 billion. This amount includes value-added tax (VAT) and excise duties evaded from the sale of illicit cigarettes.
The R85.6 billion seems, at least to me, low hanging fruit for the minister to pursue in order to increase tax revenues. However, to date, it is surprising that government has not undertaken greater effort to assist SARS in collecting a big portion of this R85.6 billion.
Tax revenue loss due to the illicit trade in cigarettes did exist prior to 2019, though it was not as prevalent as it is today. This means that the R85.6 billion losses are much lower over the long term. During this period of tax revenue losses, excise duties were increased on a yearly basis and VAT was also increased in 2018 from 14% to 15%. Due to these increases, current excise duties make up over 50% of the average retail price of legally sold cigarettes – and the tax compliant producers pass these increases on to their customers.
According to the Oxford Economics report, despite these increases, excise duties paid by the tobacco industry decreased by 36.3% in 2020 to R11 billion and according to the minister, based on SARS’ data, revenue from tobacco and cigarette products dropped from R13.4 billion in 2015/16 financial year to R9.4 billion in 2024/25, a 29.6% (R4 billion) decline over 10 years. A major reason for the drop is attributed to the 2020 ban by government on the sale of cigarettes which attributed to the increase in illicit trade in cigarettes, which now constitute over 70% of all cigarette sales in South Africa. Although the 2020 tobacco and cigarette sales ban largely contributed to the rise in illicit trade, the increasing excise duties also contributed. However, according to the Tobacco Control Data Initiative report: Strengthen Tobacco Taxation in South Africa[2], the increased duties also contributed to the reduction in smoking in South Africa.
Despite government’s awareness of the illicit trade problem and their contribution to the over R85.6 billion of tax revenue losses, it is surprising that the minister has not treated the eradication or control of the illicit cigarette trade as a national crisis that needs immediate and decisive action. Addressing this problem cannot rest solely on the shoulders of SARS; rather, a coordinated effort from all relevant government agencies is essential. This approach would greatly benefit South Africa.
Imagine if only half of the R27 billion annual tax revenue losses are recovered. Inflationary adjustments to personal income tax and rebates for individual taxpayer could be provided and there would be no need for a VAT increase to 16%. To continue with the current enforcement actions may result in further reduction in tobacco and cigarette tax revenues due to tax compliant cigarette producers’ inability to compete with their non-compliant counterparts. Based on the above, the minister is urged to mobilise all of government to assist SARS in combating illicit trade in tobacco and cigarettes. The potential benefits to the fiscus and South Africa are undeniable.
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