The image of Marlon Brando and James Dean smoking a cigarette in the 1950s created a dream sold to young adults as the way to be cool. Cigarettes were originally sold as expensive handmade luxury goods for the urban elite and smoking cigarettes was seen as socially acceptable.
We all have now come to realise the health risks that cigarettes pose and in order to deter the use and consumption of cigarettes, many countries now impose tax on luxury goods.
However, the international cigarette industry is a multi-billion dollar enterprise that needed to replace lost revenue from a decrease in consumption of cigarettes. In an effort to create new business and a “better” alternative to the use of cigarettes, e-cigarettes and other new generation products (NGPs) were developed.
These NGP’s include electronic nicotine delivery systems (ENDS) and electronic non-nicotine delivery systems (ENNDS). National Treasury recently released a draft discussion paper on the taxation of electronic nicotine and non-nicotine delivery systems which discusses ways in which the use of NGP’s may be taxed. The draft discussion paper estimates that the South African market, which is still in its infancy, generated R2.54 billion in revenue from vaping products in 2018 alone and has experienced an average annual growth of 21.2 percent in these products over the 2013-2018 period. The World Health Organisation (WHO) has advised governments to regulate the use of NGPs.
Therefore, many governments have started a process of regulating NGPs through various tax and non-tax measures. The most common non-tax measures are complete sales bans, age-of-purchase requirements, advertising bans and promotion bans.
A number of countries have started implementing taxes on ENDS/ENNDS in the form of specific excise duty and/or ad valorem duty; this includes the taxation of non-nicotine solutions and an additional rate for nicotine solutions. Countries have imposed taxes in various ways, including:
- Excise duty that is calculated on the volume of the liquid measured in millilitres and the weight of the nicotine measured in milligrams;
- excise duty on both the device and liquid or cartridge; or
- ad valorem taxes.
After considering the taxes that other countries impose on the NGPs, the draft discussion paper considers 3 options for the taxation of these products in South Africa, as follows.
Option 1 uses the current guideline of targeted excise tax incidence that the National Treasury employs for excise rate determination on other excisable products. Using this approach, traditional tobacco products are subject to excise duties equivalent to 40% of the price of the most popular brand in each tobacco category. Should this approach be adopted it would necessitate the establishment of categories of products, especially where there are discernible price differences due to the presence or absence of nicotine in the products. The reason for the higher ratio for nicotine is to ensure that products with high nicotine concentration levy a relatively higher rate compared to lower nicotine products, whilst non-nicotine products also levy an excise duty.
Option 2 is the cigarette equivalence approach. This option considers whether it would be appropriate to use the number of cigarette equivalence from e-liquid for the determination of the excise rate. The draft discussion paper acknowledges that the science may not be exact considering that the method of delivery in vaping products is different to that in cigarettes. This approach implies that e-liquid solutions that do not contain nicotine will levy a relatively low excise based on a duty rate determined at the time.
Option 3 is to impose an introductory rate of 60 cents per millilitre on the volume of liquid solution plus 30 cents per milligram for the nicotine. It is intended that such a tax would account for the relative reduction in harm for a given product when compared to the use of other products. As in the case of Latvia, the proposed rate is higher for the e-liquid solution than for the nicotine levels.
The draft discussion paper notes that encouraging the use of NGP’s may entice non-smokers to smoke and in many cases become addicted to nicotine. This would be detrimental to the health of the person concerned and those around them. The WHO is also concerned about the long-term effects of NGP’s that may become evident only after the products have been around for some time. The proposal to implement an excise tax on vaping products was announced by the Minister of Finance in both the 2019 and 2020 Budgets. South Africa is a signatory to the WHO Framework Convention on Tobacco Control and one of the objectives of the FCTC is to curb the demand and supply of these products through taxation. It therefore seems likely that these products will become subject to ‘sin tax’ in South Africa in the not too distant future. The Customs and Excise Act 91 of 1964 provides for the levying of customs and excise duties and would be used for the e-cigarette excise regime to be administered by the South African Revenue Service.
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