SA economy needs growth agenda – and there is no room for further tax increase

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With each passing day, South Africans are waking up to the disturbing reality of how close the country came to the brink of oblivion. Revelations at the Zondo and Nugent inquiries are enough to jolt even the most placid amongst us to ask deep questions about the bona-fides of those who were charged with running the state over the last few years. At no other point of our short history as a democracy have our leaders undertaken such a comprehensive process of dismantling the state with the sole objective of hollowing out institutions of governance for their personal gain.

Many have written about the wrecking ball wrought on the South African Revenue Services and the debilitating impact of this on the institutions’ ability to collect revenue. As we now all know, South Africans are living on credit because our leaders allowed this cornerstone of our democratic project to be dismantled by self-interested individuals with no experience or desire to make a meaningful socio-economic difference in the lives of South Africans. Quite the contrary in fact. We also know that the popular narrative of a rogue unit in SARS was an invention designed to emasculate one of the most important business units in the institution with the sole objective of removing dedicated public servants who had made it their life’s mission to bring to a halt the illicit trade in tobacco. It is a tragedy that SARS was allowed to be emaciated.

What many of us would not have realised is that illicit trade has grown to such a staggering level that it literally threatens to displace the legal tobacco market in the country. According to research by Ipsos, government fails to collect in excess of R8 billion in annual excise revenue because of illicit tobacco trade. Many of us will also not know that the legal tobacco sector supports over 10,000 jobs in tobacco farming in poor provinces such as Limpopo, Mpumalanga, North-West and most recently the Eastern Cape. Because of illicit trade, these jobs are likely to be eliminated unless government takes the hard decisions required to reverse this trend.

As Business Leadership South Africa, we are acutely aware of the difficult balancing act that the New Dawn needs to navigate in order to return the country to a semblance of sanity, given the many years of inept governance wrought on the country. We firmly believe that these decisions ought to be taken sooner rather than later to ensure that existing industries are protected from illegal competition and that the integrity of our tax enforcement system is able to keep up with changing dynamics across excisable sectors.

We need to put our hands on deck to explore practical ideas to kick-start this economy. This economy needs a credible growth agenda. There is no more room for raising taxes. For this reason, we have written to the National Treasury to ask that government consider seriously the necessity of decreasing excise duties on tobacco products, which are the most affected by the incidence of illicit trade.   At the very least, government should not increase these taxes further until it has satisfied itself that it able to collect the taxes due from all who should pay them.  Though government has made very encouraging pronouncements about re-establishing the state’s capacity to enforce a level playing field in the tobacco sector by re-establishing the tobacco task force in the short term, this will unfortunately not be enough on its own, or act fast enough to reverse the rapid shrinkage of the tax base and the thousands of jobs which depend on it.   Our proposal may seem counter-intuitive to those in favour of strong tobacco control.

However, one only needs to consider that illicit trade has made tobacco that much more accessible to young people who would probably not afford tobacco if illicit trade was properly countered. For instance, reducing excise duties to Treasury’s own recommended rate of 40% of the retail price, as opposed to the currently effective 42.5% will save jobs that are likely to be lost in the near term due to illicit tobacco and the burden of excise duties which further erodes legal tobacco’s competitiveness against illicit tobacco.

The government has promised businesses policy certainty, yet it has now deviated from policy as far as tobacco taxation is concerned.  It, at least should not deviate further.  It may want to change the policy and, in keeping with President Ramaphosa’s commitment to business that should only happen through a consultative and transparent process.  But until it does change the policy it should stick to it.

Illicit cigarette manufacturers in South Africa present themselves as small local companies doing battle against big multinationals.  This is a gross mischaracterisation.  They are not!!!  They are criminal enterprises who cover up the majority of their cigarette production and sales.   They do not support local agriculture, they are causing retrenchments in the legal industry, they rip off the fiscus to the tune of at least R8 billion and possibly much more. What’s more, they were exposed in testimonies before the SARS Inquiry as having corrupted officials in the SARS and thereby played a role in its demise.  It is imperative that government eliminates this corrupt and illegal industry before further increasing excise taxes on that part of the industry that chooses to pay all that they owe.

Bonang Mohale is the CEO of BLSA