Countries with high taxation, such as South Africa, impose a variety of taxes including income tax (both personal and corporate), value-added tax (VAT), dividend tax, capital gains tax, and estate tax. Now, it appears that e-cigarette users in South Africa should prepare to pay additional taxes.
The South African National Treasury manages the country's economic policies, develops the annual budget for the government, and oversees its finances. The department has announced that it will release a draft of the 2022 Taxation Laws Amendment Bill, including provisions related to Electronic Nicotine Delivery Systems (ENDS) and Electronic Non-Nicotine Delivery Systems (ENNDS), in either June or July.
Afterwards, industry stakeholders will have the opportunity to provide written comments on the draft legislation. In addition, the country's permanent finance committee will have its own negotiation process on the draft bill. The legislative proposal is expected to be officially submitted for review in the mid-term budget policy statement in October.
The government has proposed the implementation of a specific consumption tax on non-nicotine and nicotine liquids used in electronic cigarettes. Users will be required to pay a consumption tax per product ranging from 33.60 to 346.00 ZAR ($2.08 to $21.38 USD), depending on the nicotine content and size of the product. The average consumption tax rate for electronic cigarettes is 2.91 CAD per milliliter.
Essentially, if the proposed bill is accepted and becomes law, users will have to pay 2.03 ZAR for every milliliter of e-cigarette liquid containing nicotine, and 0.87 ZAR for every milliliter of e-liquid not containing nicotine. It has been suggested that products with higher nicotine content will have a higher tax rate compared to lower nicotine products.
The draft states, "Unlike traditional tobacco products, many of these products are unregulated in South Africa, prompting the Department of Health to revise current tobacco control legislation to include them in the regulatory framework." "Likewise, governments in other countries have begun to regulate the consumption and use of ENDS through taxation and non-tax measures.
Wesley Grimm, Senior Partner, and Rudi Katzke, Partner, at the Johannesburg-based law firm Webber Wentzel, have stated that the South African Government is proposing to implement existing policy guidelines on products such as tobacco, and apply a specific consumption tax to electronic cigarettes. According to the two partners, demand for electronic cigarettes is largely inelastic, much like other consumable products, and resistance from consumers to the tax may dissipate in the short-term.
At a recent industry stakeholders seminar, the Ministry of Finance did not address the issue in detail. We believe that the Ministry of Finance's proposal of higher tax rates for electronic cigarette products with lower nicotine content than those with higher nicotine content may have an impact on consumer purchasing behavior," said Green.
According to Green, during the ENDS taxation and ENNDS seminar hosted by the Department of Finance, the agency reiterated its stance that the health risks associated with e-cigarettes are "largely unknown." However, one of their goals is to curb (and possibly halt) the use of e-cigarette products, including strict limitations on young users' access to these products.
The Ministry of Finance insists that the electronic cigarette industry must be regulated and taxed within its existing anti-tobacco framework. Grimm and Katsky argue that the proposal to tax e-cigarette products does not necessarily support the government's policy of reducing tobacco consumption. "More specifically, there is not enough data to speculate whether the proposed e-cigarette taxation by the Ministry of Finance will prevent young people from using them.
Taxation on e-cigarette products may have unforeseen consequences. According to Grimm and Katzke, legislators should consider what happened in the traditional tobacco industry from March 2020 to August 2020, when South Africa banned the retail of all traditional tobacco products, ostensibly to help prevent the spread of COVID-19. At the time, the government stated that by cutting off the supply of what it deemed "non-essential items," it hoped to prevent the spread of the virus among people sharing cigarettes, thus avoiding an inundation of sick smokers in the healthcare system.
The tobacco industry has challenged the decision in court, arguing that the measure was disproportionate and counterproductive. In December 2020, the South African High Court agreed and declared the measure unconstitutional. However, according to Grimm and Katzke, the legal tobacco industry has already suffered significant damage.
They added, "Taxing electronic cigarette products is likely to stimulate illegal trade of these products, just as it happened in the combustible tobacco industry." "Many critics of the industry raised this point at the workshop, and the Ministry of Finance has not addressed the proliferation of illegal cigarettes and tobacco trade, nor the possibility that taxing the electronic cigarette industry could stimulate illegal trade of these products.
Before the COVID-19 lockdown in South Africa, illegal tobacco trading already accounted for one-third of the market. During the tobacco ban, it reached unprecedented levels. A recent study by Cape Town University's consumer economics research department found that an estimated 93% of smokers were able to buy cigarettes on the illicit market during the sales ban. Shortly after the ban was lifted, South African Revenue Services Commissioner Edward Kieswetter predicted that investigating and prosecuting the corruption and illegal activity rooted in the four-month period would take years.
A study commissioned by the Vapor Products Association of South Africa (VPASA) in 2021 analyzed the economic impact of the e-cigarette industry in South Africa. The study concluded that the industry had a total value added contribution of ZAR 2.49 billion to GDP, with estimated tax revenue of ZAR 710 million in 2019 (primarily from income and value-added tax). VPASA's report found that over 350,000 South Africans used e-cigarette products, with sales totaling ZAR 1.25 billion in 2019, and the industry providing 3,800 job opportunities.
The South African government is planning to implement a proposed e-cigarette tax in January 2023. These proposals must still go through the normal legislative cycle before becoming law. The discussion document draft will take into account feedback from e-cigarette consumers, manufacturers, and importers, which could impact the proposed tax start date and its final form. The draft bill is expected to be presented as early as June 2022, further clarifying the nature of the proposed e-cigarette tax.
Grimm and Katzke suggest that the government should carefully consider the purpose of imposing taxes on e-cigarette products. They believe that the goal of restricting youth usage and improving the health of South Africans may not only be achieved through taxing e-cigarette products. Instead, there is a need to further understand the safety and efficacy of e-cigarettes, as well as the impact of e-cigarette taxes on consumers.
Grimm and Katzke suggest that the government should provide funding for further research in these areas and continue to work with the industry to develop new tax policies. They also recommend that the government take meaningful and decisive steps to combat illegal cigarette and tobacco trade, promote any successes in this area, and ensure that the legal tobacco industry is better protected from illegal competitors.
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