This article was first published by News24 / CityPress on 19 April 2026
An estimated 29.4% of South Africans consume tobacco. However, the largest tax-paying tobacco company in South Africa has closed a factory due to a loss of market share. Through its heavy-handed regulation of the industry the state has gradually strangled a tax-paying entity to the benefit of the non-taxpaying illicit market.
Tobacco products are heavily regulated in South Africa, with further regulations expected soon. At present, no tobacco advertisements or marketing are permitted in South Africa, except for Dunhill or Peter Stuyvesant displays in shops.
Tobacco is also subject to additional taxation beyond the value-added tax, which is charged on all products except for a select few. Tobacco and alcoholic products are subject to so-called sin taxes. As the name suggests, these are taxes imposed on ‘sins’ such as smoking and drinking. Sins according to whom? The state, of course!
The legal context within which the industry operates presents the first challenge. Consider the conflicting motivations underlying sin taxes. Sin taxation on tobacco products is justified in several ways, one of which is to fund the health burden that smokers impose on a publicly funded healthcare system.
Smoking causes long-term health problems, leading to greater use of health services compared to the average non-smoker. Consequently, sin taxes are imposed on smokers to offset these additional costs. This appears somewhat reasonable if the sin taxes were ring-fenced exclusively for health funding; however, this is not the case.
Sin taxes are allocated to the general revenue fund, which National Treasury then distributes to various departments. Therefore, sin taxes serve as a source of revenue for the state rather than being specifically intended to offset the additional public health costs caused by smokers.
Ideally, this means the state would want this source of revenue to grow, as a decrease would result in less money available to spend. However, through mechanisms such as sin taxes – which increase the price of tobacco products – tobacco businesses that pay these taxes are effectively doomed to fail.
If the social engineering aim of sin taxes is successful – namely, to stop people from smoking – tobacco companies will lose their customers as the market will cease to exist. While this outcome is unlikely at present, it is still worth highlighting. Citizens are individuals with agency, capable of making their own decisions, just as those in government are.
The next obstacle that guarantees failure is the loss of market share to the black market due to continual price increases. The illicit market, which is estimated to account for 75% of the cigarette market, is certain to continue growing. Businesses that pay taxes to the state cannot compete on price with illicit producers because of unavoidable costs, such as sin taxes, regardless of how much they restructure their operations to improve efficiency.
The logic of sin taxes, when viewed pragmatically as a source of government revenue rather than ideally to discourage smoking or fund healthcare, is self-defeating.
Illicit market producers do not pay taxes, whereas formal producers do; this is largely what determines market share. In a stagnant economy characterised by high unemployment and low wages, price competition dictates business survival. As we are witnessing in the formal tobacco industry, established companies are being undermined while new dominant players emerge in the illicit market.
For consumers, the availability of lower prices, even on the black market, is a welcome reality. The reason the market share of illicit producers is increasing is that consumers are choosing these lower prices.
The formal tobacco industry, instead of calling for the same regulations that have devastated their businesses to be applied to illicit producers, must advocate for the repeal of these regulations on themselves in order to compete effectively.
The South African government appears intent on undermining the tax-paying tobacco industry. If the current regulatory and taxation regime persists, the state will continue to incur higher healthcare costs associated with smokers, without the corresponding revenue to offset these expenses.
The solution is simple: significantly reduce sin taxes or at least impose a temporary five-year moratorium to allow the industry to recover its market share, as formal producers finally can compete in the market.
Failure by the state to act will cause its revenue from sin taxes to dwindle to almost zero, despite nearly 30% of South Africans continuing to smoke. One cannot drive an industry to extinction and still expect it to fund the state.
