South Africa takes ‘precautionary’ steps towards a flat rate tax on all e-liquids

South Africa is looking to introduce taxes on vaping products as part of tobacco control measures in line with World Health Organization (WHO) guidance.

Finance minister Enoch Godongwana said during his February Budget speech (pictured) that the government proposed to introduce a new tax on vaping products of at least ZAR2.90 ($0.20) per ml from 1st January 2023. Work must still be done to implement the rate, which was arrived at after a period of consultation, and there remains a chance it could change.

The WHO has advised governments to take a precautionary approach to the regulation of vaping products, which it says could have detrimental effects on health. South Africa is a signatory to the WHO Framework Convention on Tobacco Control (FCTC), one of the objectives of which is to curb demand through taxation.

The South African Treasury said the 1964 Customs and Excise Act would be used for the e-cigarette excise regime, which would be administered by the South African Revenue Service (SARS).

A consultation on different potential taxation methods was initially put forward and it is now believed that a flat tax rate based on the amount of liquid contained in a vaping device has been agreed in principle. Although the tax is not a done deal, the Treasury has started work on legislation to be submitted to Parliament, with a bill that could come into effect in January.


Rejected alternative calculations


Alternatives considered in the consultation included a flat tax linked to the amount levied on conventional cigarettes; a tax based purely on e-liquid volume; and a tax per ml of nicotine and non-nicotine elements of the solution at a ratio of 70:30. This last idea was ultimately rejected as being too complicated to enforce.

“If we wanted to tax optimally, one option was to base that on the amount of nicotine in the product and then tax those with no nicotine at a lower rate. It’s a nice policy design idea, but almost all countries tax on a flat rate based on the amount of liquid, not nicotine concentration. It’s incredibly simple but unfortunately it doesn’t target nicotine content. So our proposal is a flat tax rate based on the amount of liquid, regardless of nicotine concentration or the absence of nicotine,” said Chris Axelson, the Treasury’s chief director for economic tax analysis.

South Africa based its initial proposals on research into what e-cigarette and vaping taxes other countries have implemented. For example, Latvia implemented an excise tax in July 2016 calculated on two bases – the volume of liquid in ml and the weight of nicotine in mg. It was levied at a rate of €0.01 per ml of liquid plus €0.005 per mg of nicotine weight but was subsequently changed to a simple per ml tax due to the difficulty of enforcement.

South Africa also included a review of other various methods that it ultimately chose not to follow. For example, it said Kenya had introduced an excise duty levied on two bases, the device and the cartridge used, while many US states had implemented ad valorem excise tax regimes for e-cigarettes.

The South African authorities expect the introduction of vaping taxes to have a positive impact on public health. “The health consequences of tobacco consumption are well known and tobacco products have been regulated through tax and non-tax measures over the years,” reads a discussion paper on the proposal.


Arguments for and against

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    It says that while current rules have reduced smoking prevalence in the country, the introduction of new generation products (NGPs) has created a new public health risk. According to the discussion paper, the South African market generated about ZAR2.54bn ($174m) in revenue from vaping products in 2018 while growing by an average 21.2% a year over the period 2013-2018.

    “Even though these products are marketed as less harmful compared to cigarettes or traditional tobacco products, they are not without risk,” the South African Treasury said.

    South African public health expert Lenias Hwenda told ECigIntelligence that while the decision to introduce taxes on vaping products was arrived at as a revenue collection measure, it made public health sense as the health costs of e-cigarettes have not been established.

    “Some of these gadgets use vaporised nicotine and it might soon be established that the effects of using these gadgets are similar to tobacco consumption,” said Hwenda.

    However, the South African think tank the Free Market Foundation said a high level of tax on e-cigs would push more people towards traditional cigarettes and the illicit market. Higher-priced vaping products would mean poorer communities that suffer disproportionately from tobacco-related issues would have no incentive to switch to healthier alternatives. Many smokers might also simply continue to opt for black market products, which already constitute 42% of the informal market for cigarettes and could be more harmful because they may not meet minimum product standards, the foundation added.

    “The South African government argues that e-cigarette and vaping products are harmful and warrant regulation. However, e-cigarettes and vaping innovations are tobacco harm-reduction products, aimed at mitigating the adverse health impacts associated with combustible tobacco products,” the organisation said.


    A history of tax proposals


    Kgosi Letlape, president of the African Harm Reduction Alliance, told BizNews Africa that the low existing taxes on conventional cigarette products and the higher unit price for most vaping products effectively meant the two were on average priced the same. He said any tax regime would need to make vaping products accessible and affordable.

    The South African vaping market remains largely unregulated and in its infancy. Its growth has prompted the government to start a process of amending the current tobacco control legislation i.e. the 1993 Tobacco Products Control Act to include the regulation of new products.

    Taxation was proposed in both the 2019 and 2020 February budgets, with the National Treasury, SARS, and the Department of Health consulting on the appropriate mechanisms, structure and timing of the tax.

    In the 2021 budget, Godongwana’s predecessor Tito Mboweni announced that the Treasury would publish a discussion paper on a proposal to tax electronic nicotine and non-nicotine delivery systems. He said an excise duty was to be introduced later that year, following public consultations. The recent discussion paper follows those moves.

    Madalitso Wills Kateta ECigIntelligence contributing writer

    Photo: Government of South Africa

    Author default picture


    This article was written by one of ECigIntelligence’s international correspondents. We currently employ more than 40 reporters around the world to cover individual vaping markets. For a full list, please see our Who We Are page.

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