Godongwana Urged to Resist Temptation to Impose Unsustainable Sin Tax Hikes

As South Africa grapples with a massive budget shortfall, all eyes are on Finance Minister Enoch Godongwana ahead of his first budget speech under the government of national unity (GNU). The government is considering a range of revenue-raising measures, including hiking sin taxes on alcohol and tobacco products, to address the financial gap. However, Tax Justice SA (TJSA) has warned that such increases could backfire, further fueling the rampant illicit trade that robs the country of billions in lost tax revenue each year.

Scheduled for Wednesday at the Nieuwmeester Dome in Cape Town, Godongwana’s speech is expected to outline South Africa’s economic, social, and fiscal priorities for 2025. Among the proposals being considered by National Treasury are hikes in several taxes, including value-added tax (VAT), personal income tax, and corporate taxes. Some reports have also indicated the potential introduction of a wealth tax and hikes to the fuel levy. However, the most controversial of these measures are the proposed increases to sin taxes.

The Risks of Raising Sin Taxes

While sin taxes on cigarettes and alcohol are popular tools for discouraging unhealthy behavior, the consequences of further raising these taxes could be far-reaching. TJSA founder Yusuf Abramjee argues that increasing these taxes would not solve the budget shortfall but instead encourage more consumers to purchase illicit goods. “The fiscus is haemorrhaging billions because law enforcement agencies are failing to crack down on the massive black market in these sectors,” Abramjee stated.

Illicit trade, which already costs South Africa over R100 billion in lost tax revenue annually, has reached crisis levels. With legal tobacco and alcohol products becoming more expensive due to high taxes, criminals have seized the opportunity to provide cheaper, illegal alternatives, further straining the economy. This thriving underground market not only undermines legitimate businesses but also robs the government of essential funding needed to support public services like healthcare, education, and infrastructure.

A Call for Stronger Enforcement

Rather than increasing the financial burden on law-abiding South Africans, Abramjee urges Godongwana to focus on tackling the illicit trade directly. “Instead of imposing more punitive taxes on law-abiding citizens, Minister Godongwana must ensure that enforcement and prosecution authorities are properly resourced to take down the syndicates responsible for illicit trade,” he said.

In addition, Abramjee called for clarity from Godongwana regarding the South African Revenue Service (SARS) and its role in combatting tax evasion and money laundering by cigarette manufacturers involved in the illicit trade. The failure to revoke licenses from these companies, Abramjee believes, is a missed opportunity to recover billions in lost revenue and reduce the pressure on South African taxpayers.

The Economic Impact of Sin Tax Increases

Beyond the moral argument, there is a clear economic rationale for resisting further sin tax hikes. The state already spends billions on diabetes, heart disease, and other health issues exacerbated by alcohol and tobacco use. In 2018 alone, South Africa spent R2.7 billion on diabetes-related healthcare costs. Raising sin taxes would likely push even more consumers toward cheaper, unregulated alternatives, worsening both public health outcomes and the government’s financial position.

The economic consequences of higher sin taxes would also be felt by businesses and workers. Illicit trade undermines legal enterprises, often pushing them into the black market, and limiting economic growth. South Africa, already facing high unemployment and low growth rates, cannot afford to exacerbate these problems by further taxing its citizens.

Finding Sustainable Solutions

While the government faces immense pressure to raise funds, especially in light of unplanned expenditure like bolstering HIV/AIDS programs, the focus should be on long-term solutions that address the root causes of South Africa’s fiscal challenges. According to Abramjee, a whole-society approach to combating illicit trade and improving tax collection is key to creating a more sustainable and fair taxation system. “Targeting law-abiding consumers and businesses with even higher taxes will backfire. The solution is to clamp down on the illicit economy, reclaim the stolen billions, and use them to build a better South Africa for all,” he concluded.

As Godongwana prepares to address the nation, the real challenge lies not in imposing higher taxes but in tackling the systemic issues of illicit trade, tax evasion, and insufficient enforcement. By focusing on these critical areas, South Africa can build a more sustainable financial future without resorting to punitive tax hikes that could harm the economy and its citizens.

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