South Africa’s ban on the sale of alcohol and tobacco during the coronavirus lockdown is costing the country roughly ZAR 135 million ($7.4 million) per day in tax revenue, according to industry groups and observers.
“The ban of alcohol and cigarettes is an unprecedented action in a democratic South Africa,” Dale Cridlan, director of Norton Rose Fulbright Tax Services in Johannesburg, told Tax Notes. He said the bans are costing the country an estimated ZAR 35 million a day in cigarette levies and taxes and ZAR 100 million a day in alcohol levies and taxes.
Cridlan said that before the lockdown, the National Treasury had budgeted collections of ZAR 14.4 billion in tax revenue from cigarette and tobacco sales and ZAR 500 million from pipe tobacco and cigars during fiscal 2020-2021. “The expectation is that there will be a large variance between the actual tax collections and the budgeted tax collections arising from the decline in the sales of alcohol and tobacco products as a consequence of the lockdown,” he said.
On March 27 South Africa went into a three-week lockdown to curb the spread of the coronavirus and banned the sale of tobacco products and alcohol during that period. On April 9 President Cyril Ramaphosa extended the lockdown until the end of April, citing its role in keeping new coronavirus infections down.
Media reports, tobacco groups, and nongovernmental organizations say banning the sales of these products is dangerous because it gives rise to the shadow economy that South Africa has been cracking down on in recent years.
In an interview on the AM radio station CapeTalk, Justice Project South Africa President Howard Dembovsky said the ban is a departure from the COVID-19 mitigation tactics of other countries.
“If you look at what other countries have done, they’ve shut down things like pubs and taverns, and that I can absolutely understand . . . but they’ve not shut down off-license sales, and they certainly haven’t imposed a prohibition on smoking,” Dembovsky said April 7, warning that South Africa’s bans encourage illicit trade. “What we are doing is encouraging organized crime.”
British American Tobacco South Africa (BATSA), the largest tobacco producer in the country, has asked the government to lift the tobacco ban, citing unintended health risks.
“It will unintentionally force 11 million smokers to go outside of their neighborhood in search of outlets willing to defy the ban, as we’ve seen in some media reports,” BATSA said in an April 4 statement. “This would lead to greater movement of people and more interactions than if smokers were able to buy cigarettes at their nearest legal outlet at the same time as buying all their other essential goods.”
BATSA paid about ZAR 13 billion in taxes last year, ZAR 10 billion of which was tobacco excise. Cridlan warned that the bans could have a lasting negative effect on South Africa’s budget.
“A shadow economy in alcohol and tobacco sales leads directly to a reduction in tax collection to the extent that the sales lost during the lockdown period cannot necessarily be made up after the lockdown,” Cridlan said. “This is an important issue because it negatively affects the tax collection of the country, which has the direct result of increasing the fiscal deficit and facilitates the illicit trade in alcohol and tobacco products at the same time.”
Each year, South Africa loses ZAR 7 billion to ZAR 8 billion in excise tax from the illicit tobacco market and ZAR 6.4 billion from the illicit alcohol market, according to research from Business Leadership South Africa.
Cridlan said that while the government imposed the ban to limit an increase in domestic violence incidents during the lockdown and to reduce the pressure on emergency services caused by liquor-related factors, the move is likely to be ineffective.
“Anecdotal evidence suggests that the growth of the shadow economy and the corroborating loss of tax revenue from the ban of alcohol and tobacco products will lead to a further contraction in the South African economy, whilst the growth in the shadow economy suggests that individuals continue to purchase tobacco and alcohol products, thereby arguably defeating the stated purpose of the ban,” Cridlan said.
The South African Revenue Service announced April 1 that because of a sluggish economy and less consumer spending, revenue collections were down several billion rand short of initial projections for fiscal 2019-2020.