Don’t raise VAT, rather clamp down on illicit trade

Minister of Finance Malusi Gigaba and his team from National Treasury walk into Parliament ahead of the 2018 Budget speech. PHOTO: Ayanda Ndamane/ANA

Billions of rands can easily be brought into over-stretched-state coffers if illicit trade is addressed with urgency. 

South Africans were shocked in October last year when then Finance Minister Malusi Gigaba informed the nation in his mid-term budget speech that a drastic decline in economic growth, coupled with “a sharp deterioration” in tax collections had led to a tax revenue shortfall of R50.8bn, which he acknowledged is the largest under-collection since the 2009 recession.

Since then, we have seen Minister Gigaba announce a 1% value-added tax (VAT) increase – the first in our democratic era – to try to address the revenue shortfall, and Nhlanhla Nene replaced him as the person holding the purse strings.

No matter who is in charge, it seems that the current plan is for ordinary South Africans to literally foot the bill for the government’s revenue shortfall. The result of this revenue shortfall means that government has less money for sorely needed service delivery, the effects of which are apparent across a deeply economically divided South Africa.

But, Treasury and the South African Revenue Services (SARS) are missing a trick. They have a significant, untapped source of income that is not being considered in the rush to find ways to plug the fiscal gap: taxing the ever-growing black market. 

I joined the Food and Allied Workers Union (FAWU) in Pretoria this week. Thousands marched on SARS HQ to say #FightIllicit. We should all be deeply concerned that the revenue collections’ authority is simply not doing enough to clamp down on illicit traders and, by implication, tax evaders. This has implications on legitimate jobs and the literal health for our country, given the health risks associated with illicit products such as alcohol and tobacco.

It is clear that today’s SARS either does not have the capacity or the willingness to enforce existing laws and regulations against illicit traders and tax evaders. 

They have the mandate to do so, but instead we are witnessing billions of rands missing the government tax net, with seemingly no plan from SARS to address this. The illicit economy is growing at a rapid pace and urgent action needs to be taken to curb and reverse this. 

SARS has not done enough, in my view, to address the issue of illicit financial outflows out of South Africa, which is put at nearly R60 billion in the 2015/16 fiscal year alone. Similarly, domestic illicit trade in tobacco and alcohol is estimated at billions of rands in lost tax revenue. 

Based on this, if government manages to effectively eliminate – or even reduce – the illicit economy, we can reduce the challenge of revenue shortfalls we are facing today. The rise in the illicit trade in tobacco and alcohol also poses a serious threat to jobs in affected industries. With a country that is facing a jobs crisis, we cannot afford any more job losses as just one job loss is too many to tolerate.

For instance, the country’s largest cigarette manufacturer, British American Tobacco SA, has reduced its factory manning levels and numbers of tobacco leaf growers because of the increase in illicit trade. The company actually estimates that 10 000 workers’ jobs are at risk, and FAWU and other unions are understandingly angry. 

Another example is in the poultry industry, where we have already experienced job losses due to the surge of dumped chicken on our shores. Adding to this is that the Health Promotions Levy (HPL), earlier known as sugary and sweetened beverages tax, will result in estimated job losses of between 5 000 and 8 000 in the legitimate sugar value-chain. With the dumping of raw sugar and sweetened candies as well as illicitly traded soft drinks increasing in popularity because of the higher cost of legitimate product, the jobs at stake are sure to be a lot higher.

South Africa has tended to view the tobacco and alcohol industries as reliable sources of revenue flows and since the implementation of the current excise regime in 2002. Tax rates on most tobacco products and alcoholic beverages have consistently increased above inflation annually. As a progressive union, we have no difficulty in accepting that these industries must pick up a reasonable share of the external costs attendant to their products. 

However, we are also mindful that in the near future, excise will reach its inevitable point of diminishing returns if government does not take serious measures to curb the growing problem of illicit trade. Soon enough, government will find itself realising less revenue from these industries despite raising duties due to the rapid rise of duty-not-paying players, which are growing their market share at an alarming rate, at the expense of duty paying operators. 

At the same time, assuming the much-touted rationale of sin taxes to be discouraging the use of these products, an argument can be made that we as a society we are losing the fight for healthy bodies, especially amongst the under-aged.

The rise of illicit tobacco especially poses a major threat to the young kids as they are in a position to afford these toxics low-price brands. 

A drive or a walk into many township or rural areas will reveal that a lot of cigarettes sold in these areas are traded at about R15 to R20 per pack or as low as R0.50 for a loose cigarette. This is against the minimum collectible tax of R16.50 per pack of cigarettes, which is made up of VAT and excise duties due to the government coffers. Because of this, the fiscus is estimated to have lost out on R24 billion worth of revenue since 2010 given that, plausibly, the high taxes are fanning illicit trade

Current estimates put illicit tobacco at between 30% and 45% of the total tobacco market in South Africa. Illegally dumped chicken constitutes about 33% to 35% of all chicken consumed in the country and this means market share is bigger than the biggest poultry company, Astral Foods Chicken, and some of it may not be getting excise duty paid or quality-checked.

By not dealing with such illicit traders and illegal operators,we will witness these players continuing to cheat the fiscus further and more with SARS are enabling their illicit trade by inaction.

This threatens the sustainability of the commercially Viable, tax-paying and quality standards-compliant players and the livelihoods of tens of thousands of people are at risk at a time when South Africa is struggling to tackle 37.7% unemployment rate. This inaction by SARS does also exacerbate the fiscal challenges that the country face, simply by allowing rogue elements to take over the formal and legally-compliant economy.

We cannot allow lack of action by SARS any longer hence FAWU and others marched to SARS offices to deliver the Memo of Petition to call on SARS, as an institution, to collaboratively work with South African Policy Service (SAPS), in clamping down on these illicit traders and tax evaders by enforcing existing laws on excise and tax.

All of these efforts by SARS and SAPS could result in the saving of permanent and formal jobs, the revenue flows to the fiscus and the health of the population. In the name of Jobs, Revenue and Health we believe our call to SARS is a clarion one and patriotic a call to be positively responded to! 

I have also previously written how billions of rands of cash is leaving out country weekly through money-laundering called, “Hawala.” Most of it is from suspected organized crime. I have raised the matter with SARS and the SAPS and it’s time they acted.

We want to now see action…and fast!

My appeal to government and especially law enforcement agencies is loud and clear: #FightIllicit and #CrimeMustFall. Please #MakeSASafe

Yusuf Abramjee is a social and anti-crime activist. He also heads-up #MakeSASafe