Legislation which criminalises behaviour between consumers and sellers, that would otherwise be treated as lawful and normal conduct, frequently has adverse unintended consequences.
A prominent example of this is legislation that imposes taxes on specified things or conduct. Tax laws can be a major factor in giving rise to black markets in order to evade the taxes.
Economist Friedrich Hayek pointed out that many well-intentioned measures have unforeseen consequences. Legislated restrictions, however well-meaning, can perversely incentivise the committing of unlawful acts.
In March 2020, in response to the coronavirus pandemic, the South African government banned the sale of tobacco products for 20 weeks.
A study by researchers at the University of Cape Town (UCT) into the economics of excisable products found, however, that the sales ban did not have the intended effect of discouraging smoking on a large scale.
A significant reason for this was that the market for illicit cigarettes was well-entrenched. The illicit-cigarette market boomed during the sales ban. Even now, after the lifting of the ban, the legal market remains substantially smaller than it was before.
The illicit retail trade is carried on at lower selling prices than the taxed trade.
South Africa imposes an excise duty on cigarettes and other tobacco products (and on liquor and petroleum products), in terms of the Customs and Excise Act. Excise duty is a fixed amount levied on each unit of the product.
The excise duty is payable by the licensed manufacturer at the time of manufacture of the article. (If the articles are imported, customs duty is payable instead.)
According to the South African Revenue Service (Sars), excise duties and levies are imposed mostly on tobacco, alcohol and petroleum products.
Sars maintains that excise duties have two functions: “The primary function of these duties and levies is to ensure a constant stream of revenue for the State, with a secondary function of discouraging consumption of certain harmful products, i.e. harmful to human health or to the environment.”
These two functions are not necessarily compatible.
According to Sars, the revenue generated by these duties and levies amount to approximately ten per cent of total revenue received by Sars.
The retail price of a taxed pack of twenty cigarettes would comprise manufacturing cost, excise tax, wholesale and retail margins and distribution, manufacturer’s profit, and value-added tax (VAT) on the sum of the different components.
Excisable goods such as cigarettes may by law only be manufactured in a licensed customs and excise manufacturing warehouse. And cigarette manufacturers must be licensed by Sars’s excise department before they may commence manufacturing.
Licensed manufacturers are expected to “self-assess” the excise duty payable each month, by reporting to Sars the quantity of cigarettes which they manufactured that month and paying that amount to Sars.
The current excise duty on ten cigarettes is R10.89. The excise duty on a pack of twenty cigarettes thus amounts to R21.78.
As of 2022 the retail selling price of a taxed pack of twenty cigarettes of South Africa’s best-selling Peter Stuyvesant brand was about R33.00.
The UCT researchers, in a recent study, estimated the number of “illicit” (undeclared and untaxed) cigarettes sold in the market during the period from 2002 to 2022.
The researchers concluded that any retail sale of a pack of twenty cigarettes during the year 2017 (the year for which they had the most detailed data) at a price of less than R23.00 would indicate that excise duty and VAT were not paid.
Their assessment was that the illicit cigarette market peaked at 60 percent in 2021 (but decreased to 58 percent in 2022).
In April 2024, reportedly, about 70 percent of all cigarettes sold in South Africa are illegally produced and untaxed.
There may be more than one reason for the market in illicit cigarettes being well-entrenched. The first and significant reason is that the illicit retail trade is carried on at lower selling prices than the taxed trade, as mentioned.
A second reason why the market in illicit cigarettes is well-entrenched may be the institutional deterioration within Sars during the period of State capture in the previous decade, which was identified in the 2018 reports of the judicial commission of enquiry into tax administration and governance by Sars.
Laws prohibiting liquor or drugs lead to consequences which are akin to the consequences of laws that impose taxes on cigarettes and other tobacco products to discourage smoking.
Laws in the United States in the 1920s prohibiting alcohol, originally enacted to suppress the alcohol trade, led to control by organised criminal syndicates over the illegal alcohol industry. Since alcohol was still popular, criminal syndicates producing alcohol were well-funded.
Likewise, the fifty-year war on drugs, which was instituted in 1971, was intended to suppress the illegal drug trade, but instead has increased the power and profitability of drug cartels worldwide, who have now become the primary source of the prohibited products.
In South Africa, there are reported links between illicit tobacco producers and smugglers; gold smelters, refiners and traders; forgers; local and cross-border money launderers; accomplices and collaborators within banks and companies local and foreign; negligent banks; and cash-in-transit companies and clearing agents.
There is wide scope for tax evasion. Taxes imposed in South Africa include air-passenger tax, capital-gains tax, corporate-income tax, diamond-export levies, dividends tax, donations tax, estate duty, excise duties and levies, international-oil-pollution compensation-fund levies, mineral-and-petroleum-resource royalties, pay-as-you-earn, personal income tax, provisional tax, securities transfer tax, skills-development levies, transfer duty, turnover tax, unemployment-insurance contributions, value-added tax, withholding tax on interest, and withholding tax on royalties.
The government should decriminalise victimless crimes and focus instead on suppressing violent crimes.
South Africa is a member of the World Health Organisation (WHO). In 2003, WHO member states entered into a Framework Convention on Tobacco Control.
This Framework Convention stipulates mildly that, with a view to eliminating illicit trade in tobacco products, each party shall “enact or strengthen” legislation, with appropriate penalties and remedies, against illicit trade in tobacco products, including counterfeit and contraband cigarettes.
South Africa is a signatory to the Framework Convention and has formally ratified the Convention.
Building on that Framework Convention, in 2013 the states party to that convention entered into a stricter Protocol to Eliminate Illicit Trade in Tobacco Products.
The protocol goes further than the Framework Convention. The protocol’s declared objective is to eliminate all forms of illicit trade in tobacco products.
The protocol stipulates that Parties to the protocol must adopt and implement effective measures to control the supply chain of tobacco products in order to prevent, deter, detect, investigate and prosecute illicit trade in such products; and must take any necessary measures to increase the effectiveness of their competent authorities responsible for preventing, deterring, detecting, investigating, prosecuting “and eliminating” all forms of illicit trade in tobacco products.
The protocol also requires each party to adopt such legislative and other measures as may be necessary to establish as unlawful under its domestic law the manufacturing, wholesaling, brokering, selling, transporting, distributing, storing, shipping, importing or exporting of tobacco products without the payment of applicable duties, taxes and other levies or without bearing applicable fiscal stamps.
South Africa is a signatory to the protocol but is yet to ratify it.
Gary Moore, a practising attorney for 30 years, is a senior consultant at the Free Market Foundation. He has written extensively on the legality of state action and the meaning of statutes.
Tax laws can be a major factor in giving rise to black markets in order to evade the taxes
