A judgment by the Supreme Court of Appeal (SCA) in June 2022 has confirmed the findings of a research paper published by two University of Pretoria (UP) academics in the prestigious New Zealand Journal of Taxation Law and Policy.

Professor Teresa Pidduck and Sumarie Swanepoel, of UP’s Department of Taxation in the Faculty of Economic and Management Sciences (EMS), predicted the case’s eventual outcome in a paper titled ‘Sobering up in South Africa: The Sin Tax Consequences of a Pandemic’ and published in December 2021.

The SCA judgment, delivered on 14 June, dismissed Co-operative Governance Minister Nkosazana Dlamini-Zuma and President Cyril Ramaphosa's effort to reverse a Western Cape High Court decision that the cigarette ban implemented in the first months of the COVID-19 pandemic in 2020 had been unlawful. Instead, the government not only lost with costs at the SCA, but also had retroactive costs awarded against it for the High Court case.

In their research paper, Prof Pidduck and Swanepoel described how the South African government responded to the COVID-19 pandemic through fiscal measures, with a particular focus on the alcohol and tobacco bans. While both these bans were considered too severe and fairly unique internationally, the outcome of the SCA judgment in relation to the cigarette ban was particularly compelling.

“Both the SCA judgment and our publication made arguments for a temporary increase in excise taxes on cigarettes, as opposed to the cigarette ban implemented by the government,” Prof Pidduck explained. “Our paper concluded that an excise tax increase may have had better results in driving the desired change in behaviour – a reduction in smoking – while still generating and protecting tax revenues in both the short and long term, particularly for those consumers who were unaware of the illicit trade avenues before the prohibition.”

The SCA reached a similar conclusion, stating in its judgment that “… the State could have achieved the same outcome by imposing a temporary increase in excise duty on cigarettes, so that the price of cigarettes sold lawfully would be the same as the price of cigarettes sold unlawfully during the lockdown. The difference, as the full court pointed out, is that the fiscus would then have collected the tax revenue lost when cigarettes were sold unlawfully". 

The researchers say that, although it is very difficult to quantify how much tax revenue was lost due to the ban and subsequent boom in illicit cigarette sales, a conservative estimate is that around R6bn was lost in excise taxes on tobacco products alone. “More would have been lost due to reduced sales and the company tax that could have been collected on that, and even more if you factor in the cost to the economy and gross domestic product – but, overall, it is very difficult to estimate,” Swanepoel, who is a senior lecturer in UP’s Taxation Department, said.

Their research paper examined the question of whether or not the banning of tobacco and alcohol sales in South Africa in the early months of the COVID-19 pandemic aligned with the South African Revenue Service’s (SARS) own goals for their excise taxes, namely to a) generate revenue and b) create a change in behaviour.

Their published findings were ultimately echoed and confirmed by the SCA, which found that a) revenue was lost and potential tax income was instead diverted toward the illegal tobacco market, creating possible permanent damage in terms of revenue lost when people who didn’t know how to access cheaper, illicit cigarettes were in effect forced to find a way to buy cigarettes, and b) people did not smoke less, and thus the ban was not effective at changing behaviour.

“There was certainly more short-term justification for the alcohol ban than the tobacco ban, but in terms of tobacco, there were other options the government could have considered which were likely to have proved more effective, without damage to the revenue-generation potential of tobacco sales,” Prof Pidduck said. 

Their paper found that an increase in excise taxes on tobacco instead of a ban could have prevented lost revenue and loss of market share to the illicit market, and that an increase in excise taxes could have led to limited behaviour change.

“Infringing on citizens with bans is never ideal and should be done very cautiously,” Swanepoel added. “Although there was some evidence of positive impacts of the alcohol ban, it is also quite dangerous to deny access to alcohol to those who are addicted, as this too can lead to death, so a complete ban and infringement to this degree should be done very carefully and only if needed.”

The researchers say the SCA judgment also confirms their recommendation for how future pandemics should be approached. “With experience and research to refer to now, it’s clear that tax is not the only tool with which to tackle issues of addiction. It is one tool, and it should be part of a broader drive from government to ensure that before another pandemic hits us that addicts have resources at their disposal, including mental health care to help them quit. We must also address the issues of binge drinking-fuelled violence in our society that drove us toward a ban on alcohol in the first place. Above all, as we wrote at the end of our paper, the fear generated by a pandemic and the response to it requires compassion, including from a government towards all its citizens.”  

Their research paper can be accessed via the New Zealand Journal of Taxation Law and Policy.