An increase in tobacco tax might not be helpful for revenue levels in SA

While experts and policy makers focus on tax rates and their role in developing capacity within the South African Revenue Services (SARS) Chief Economist at economy consultancy Econometrix Azar Jammine has examined the significance of tobacco tax and sales on overall revenue levels. 

Jammine bases his analysis on research conducted by Econometrix, which found a decrease in the amount of revenue collected on the sale of tobacco. The decline came in the excise collected, and amounted to just under R2 billion between 2015 and 2017, as per National Treasury estimates.

The natural reaction in such a scenario tends to be an increase in the tax rates on items such as tobacco and alcohol (sin taxes), something that is expected to feature in the upcoming budget in February. However, this might not be the most adept strategy according to Jammine.

In response to an increase in tax on tobacco and the consequent increase in its price, consumers in South Africa have begun to obtain tobacco through illicit means, which reduces the cost of consumption significantly. Taxed tobacco costs nearly R18 for a pack of cigarettes while illicit packs can be obtained for as much as R10.

A further increase in tax rates, therefore, would only result in an increase in such illicit consumption and consequently lower revenues for SARS. Jammine predicts such an outcome as a certainty, based on alternative testing of the scenario conducted by Econometrix.

On the other hand, if the excise rates on tobacco were to be maintained, there might continue to be a decline in the overall volume of tobacco sold, although the government revenues on tobacco would increase by a 0.1%, given that the rate of decline will be less than if tax rates were hiked.

This is the strategy that Jammine recommends. Arresting the tobacco prices at their current levels on a temporary basis would stabilise the situation, whle the announcement of a minimum price for the sale of tobacco would ensure that some revenue continues to flow in.

The Econometrix analysis comes on the back of several efforts from SARS to renew its capacity after a period of sustained tax defaults. Strategies have included an overall increase in tax rates across the country as well as the decision to publicly call out tax defaulters for deterrent value.