A sinful cycle: How excise duties fuel the illicit economy they were meant to counter

Every February, South Africans brace for the annual Budget speech ritual. Finance ministers rise in Parliament, surrounded by leather-bound tomes and television cameras, to deliver news about VAT, fuel levies and, inevitably, the annual increase in “sin taxes” on alcohol and tobacco.

From Pravin Gordhan to Nhlanhla Nene, Tito Mboweni to Malusi Gigaba, and now Enoch Godongwana, the script has remained remarkably consistent: above-inflation hikes justified as public health measures that also generate revenue for the fiscus. The cumulative revenue from these taxes is substantial, with total collections from specific excise duties – which include alcohol, tobacco and fuel – reaching R53.5-billion in the 2024 fiscal year alone. This forms part of a decades-long haul during which sin taxes have contributed tens of billions annually to the National Revenue Fund – money that is vital for funding social grants and other government services

But two decades of this policy orthodoxy have produced an outcome that Treasury never intended and refuses to fully acknowledge.

The legal cigarette and alcohol markets are hemorrhaging consumers to an illicit economy now valued in the tens of billions of rands. The very taxes designed to discourage consumption have instead encouraged a parallel market where quality is unregulated, criminals thrive and the fiscus collects nothing.

The policy intent: A noble theory

The intellectual case for sin taxes traces back to Adam Smith’s 1776 observation that “sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation”. Modern proponents add a public health dimension: higher prices reduce consumption, improving health outcomes and reducing strain on the healthcare system.

South Africa embraced this logic wholeheartedly. Between 2013 and 2017 alone, cigarette taxes increased by nearly R4 per pack, spirits by more than R20 per bottle and wine by well over R1 per litre. The 2025 Budget continued this tradition with a 6.75% increase for alcoholic beverages and 4.75% for tobacco products.

The revenue generated is substantial. Alcohol taxes contributed R41.5-billion in 2022/23, with total sin tax revenue approaching R45-billion annually – enough to cover about 20% of social grant expenditure. For a country with 20 million grant recipients and a narrow tax base of just 6.6 million assessed taxpayers, this is not pocket change.

The unintended consequence: An illicit explosion

Yet even as Godongwana delivered his February 2026 Budget, the South African Revenue Service was sitting on data that should have given him pause. The illicit cigarette trade, estimated at 19% of the market in 2014, had ballooned to 75% by 2025. SARS commissioner Edward Kieswetter told Parliament that between 2020 and 2022 alone, the fiscus lost about R84-billion in excise tax revenue to illicit cigarettes.

The alcohol sector tells a similar story. According to Euromonitor International research presented by the Drinks Federation of South Africa, 18% of all alcohol sold in the country – nearly one in every five drinks – is now illicit. This represents a 55% increase in illicit volume since 2017, costing R16.5-billion in lost tax revenue in 2024 alone.

The arithmetic is straightforward. A legal pack of cigarettes now costs at least R35, while illicit packs sell for R10 or less just around the corner from Parliament. Illegal alcohol products undercut legal equivalents by nearly 40%. When the price gap becomes this extreme, consumers vote with their wallets – particularly in an economy with 32% unemployment and 20 million citizens dependent on government grants.

The human cost beyond revenue

The job losses are now arriving with grim predictability. British American Tobacco announced in January 2026 that it would close its Heidelberg plant, ending local cigarette production after 70 years in South Africa. The company cited an illicit market now accounting for roughly 75% of sales, making continued operations commercially unviable. About 230 direct jobs face elimination, with more than 35,000 jobs across the broader value chain – agriculture, logistics and suppliers – potentially imperilled.

The health consequences are equally troubling. Illegal alcohol products tested by the University of KwaZulu-Natal contain dangerous substances, including methanol, which can cause serious harm or death. Illicit cigarettes evade quality controls, health warnings and safety standards entirely. Whatever public health benefit might flow from reduced legal consumption is offset by increased consumption of unregulated, potentially more dangerous products.

Godongwana acknowledged as much in his November 2025 Medium-Term Budget Policy Statement. “The growing markets for illicit cigarettes and alcohol pose a serious risk to public health and undermine legitimate businesses,” he said, noting that the billions lost could have “closed our revenue gap and avoided tax increases entirely”.

A policy in denial

Yet Treasury persists. The 2025 Budget imposed above-inflation increases despite overwhelming evidence that legal products cannot compete with illicit alternatives. It is a textbook case of what happens when policy designed for functional states is applied in dysfunctional ones.

South Africa lacks the enforcement capacity to make sin taxes work as intended. The country’s borders remain porous and underresourced, easily exploited by syndicates operating with sophistication and impunity. Informal retail outlets, particularly spaza shops, have become central to illicit distribution networks. The Financial Intelligence Centre has identified criminal syndicates spanning five tiers, from financiers to manufacturers to smugglers, linked to drug trafficking and money laundering.

The Covid-19 tobacco ban provided a catastrophic preview. Instead of reducing smoking, it turbocharged the illicit market and entrenched criminal networks. Higher taxes without enforcement simply repeat this mistake.

Breaking the cycle

What would a different approach look like? First, a multiyear freeze on sin tax increases to narrow the price gap between legal and illicit products. ActionSA MP Alan Beesley has called for exactly this, arguing that a pause “will give legal businesses a fighting chance to reclaim market share”.

Second, a serious investment in enforcement capacity. The Drinks Federation of South Africa has proposed a national Multi-Stakeholder Committee on Illicit Alcohol, improved data-sharing and better control over production inputs like ethanol. These deserve Treasury support.

Third, meaningful engagement with affected industries. The Fair-Trade Independent Tobacco Association notes there has been no consultation with the tobacco sector since 2020. This is not a recipe for policy success.

Fourth, target the syndicates, not the street traders. SARS has made progress – 576 seizures worth R265-million between April 2024 and September 2025 – but this barely scratches the surface of an industrial-scale criminal enterprise.

Yet there is an uncomfortable truth: the politicians tasked with this crackdown have long been beneficiaries of opaque funding from sectors now implicated in the illicit economy. Beyond boardrooms and mining houses, there are persistent murmurs that some political parties are funded by cigarette smugglers who profit directly from the illicit trade they are supposed to help dismantle.

How can we expect decisive action against illicit networks when those networks may be funding the very political careers meant to police them? Until party funding is transparent and well-connected business figures face the same scrutiny as cigarette sellers on street corners, enforcement will remain a selective, ineffective exercise.

And last…

South Africa’s sin tax policy has become self-defeating. It raises less revenue as the illicit market expands, fails to improve public health as consumers shift to unregulated products, and destroys formal sector jobs while enriching criminal syndicates. The choice facing Treasury is whether to acknowledge these failures or compound them with another round of above-inflation increases in the next Budget.

The moralism of sin taxes is seductive. It allows finance ministers to feel virtuous while raising revenue. But virtue untethered from reality becomes vice. A policy that entrenches criminality, costs the fiscus billions and puts dangerous products into consumers’ hands is not worth preserving. It is time for a new approach. DM

Chris Maxon is a member of the Rise Mzansi National Leadership Collective, based in KwaZulu-Natal. He is also a PhD candidate at Unisa and a chartered development finance analyst.