Tax revenue lost due to illicit cigarettes in South Africa: 2002-2022.

Objective: To estimate lost excise and value-added tax (VAT) revenue as a result of illicit cigarette trade from 2002 to 2022.

Design: Using gap analysis, we estimated the number of illicit cigarettes by calculating the difference between the number of self-reported cigarettes (derived from nationally representative surveys) and the number of legal (tax-paid) cigarettes (derived from government sources) from 2002 to 2022. We then calculated the excise and VAT revenue that the government lost through illicit trade, taking into account that some people would have quit or reduced their consumption if cigarette prices had been higher (ie, tax paid).

Setting: South Africa.

Outcome Measures: Illicit trade estimates and lost revenue estimates.

Results: The illicit cigarette market comprised 5% of the market in 2009, peaked at 60% in 2021, and decreased to 58% in 2022. Accounting for the fact that some people would have reduced their consumption if cigarette prices had been higher (had the illicit marke not existed), the government lost R15 billion in excise revenue and R3 billion in VAT revenue in 2022. From 2002 to 2022, the government lost R119 billion (2022 prices) in excise and VAT revenue. The majority of the lost revenue occurred in the period 2010 to 2022, where R110 billion (2022 prices) in excise and VAT revenue was lost. A comprehensive sensitivity analysis indicates that the estimated lost revenue of R119 billion from 2002 to 2022 falls within the range of R65 billion to R130 billion (all 2022 prices).

Conclusions: The South African government has been losing a significant amount of revenue by not receiving excise and VAT from all cigarettes consumed in South Africa. This trend is likely to continue if the government does not secure the supply chain from the point of production to the point of sale.