The coronavirus pandemic and its associated economic slowdown have struck a devastating blow to South Africa. Not only is it the seventh-worst affected country in the world with more than 630,000 COVID cases, but its government is also now facing a so-called “tax implosion” which could prompt its national debt to rise to unsustainable levels.
Understandably, the government is seeking to boost its cratering revenue by instituting new taxes, raising existing ones, and introducing harsher punishments for tax-related offences. However, these measures—besides being unpopular—could risk further crippling already overburdened taxpayers. Rather than alienate the population for the sake of a few rands, the government would be better advised to plug the gaps in its leaking tax system by clamping down on illicit trade in products such as tobacco, as well as stamping out the endemic corruption which is believed to have cost the country close to R1 trillion already.
Hasty tax proposals could deepen the economic crisis
Treasury data shows South Africa’s government expenditure nearing R2 trillion in 2020, while—as a result of one of the most stringent coronavirus lockdowns on the planet—tax revenue has shrunk from by almost 30% to just R1 trillion over the last four months.
The government is attempting to turn this tide through a raft of new initiatives. As well as eyeing the introduction of a wealth tax to raise R40 billion, the Taxation Laws Amendment Bill (TLAB) also aims to make it more difficult for citizens to take their pensions abroad. Additionally, the government is hoping to tighten tax regulations on cryptocurrencies and equip the South African Revenue Service (SARS) with new powers making it easier to prosecute tax avoiders.
However, those proposals are unlikely to be welcomed by everyday citizens. With unemployment at record highs (30.1%) and over half of the population (55.5%) living beneath the poverty line, a tax hike is the last thing that many people need right now. In fact, an alarming survey recently found that 62% of South Africans would consider joining an illegal campaign of deferring tax payments as part of a protest against the government’s handling of the pandemic. The country was almost unanimous (95%) in its agreement that COVID had made them less willing to pay taxes.
Illicit tobacco trade a prime target
The fact that South Africa is one of the few nations to have banned the sale of alcohol and tobacco as part of its coronavirus response is certainly a contributing factor to its depleted coffers – excise duty collection fell by 42% in Q2 of 2020 compared to last year – but the problem was rampant before the current crisis. It’s estimated that the illicit tobacco trade has cost the government between R7 and R8 billion in lost excise tax and jobs, with the black market accounting for around a third of the overall industry.
According to the Framework Convention on Tobacco Control (FCTC) – of which South Africa is a signatory – a robust system to track and trace tobacco products is pivotal in combatting the illegal sale of cigarettes. SARS has repeatedly tried to implement such a scheme but has met with industry opposition at every turn, including its most recent attempt in 2019 – when the tender was delayed three times and ultimately canceled, all thanks to the interference of Big Tobacco.
While tobacco giants like British American Tobacco (BAT) have publicly proclaimed their staunch commitment to eradicating illegal trade, the truth is that 98% of all illicit cigarettes are produced by legitimate manufacturers, meaning they still profit from it. Were tobacco manufacturers serious about tackling the black market, they would not oppose the introduction of a comprehensive T&T system, widely recognized by public health experts as one of the best ways to tamp down on the illicit tobacco trade and recoup vital revenues.
Clipping the wings of corruption
While Big Tobacco is a significant drain on South Africa’s tax revenues, the country’s endemic graft also plays a significant role. Indeed, President Cyril Ramaphosa claimed last October that graft has cost the country up to R1 trillion. Despite Ramaphosa’s pledges to crackdown on corruption, the pandemic has seen a barrage of corruption allegations lobbed at his own party. Ramaphosa has already directed ANC members implicated in the embezzlement of the country’s unprecedented R5 billion COVID relief fund to step down from their duties, while the Special Investigating Unit had opened 20 investigations by late July. One of the most common techniques has been to artificially inflate the price of PPE and other coronavirus-related commodities, then pocket the difference.
Meanwhile, cronyism and political power-wielding in a time of tragedy has also been widespread. Even the President’s inner circle is not exempt; his spokeswoman Khusela Diko has taken a leave of absence after being accused of obtaining a tender by irregular means. The taxman is rumored to be probing 300 further companies for being granted dubious coronavirus relief tenders from the government, with some of the unlikely beneficiaries including a dead man and a car wash.
A sustainable escape route
Clearly, the South African economy is headed down a dangerous path, requiring immediate and dramatic action to pull it back from the brink. While it may be tempting to top up the treasury by increasing existing taxes or introducing new ones, that risks hamstringing a population that is already on its knees thanks to pervasive unemployment and the devastating fallout from the coronavirus outbreak.
What’s more, simply focusing on increasing inflows ignores the existing infrastructural problems with the South African tax system. With billions of rand being lost to the tobacco black market and institutional corruption every year, pouring more funds into a bucket riddled with holes will do nothing to shore up the country’s hemorrhaging economy. Neither putting a heavier burden on South African citizens nor allowing debt to balloon to alarming levels is an option; the country must take the high road and confront its ongoing challenges before it can contemplate a prosperous future.