The drop in sales volumes of excise-paid tobacco products has resulted in a significant loss of revenue for the government as consumers move to cheaper illicit products, economic research house Econometrix said on Tuesday.

Citing National Treasury data, Econometrix said income from tobacco excise declined by R1.94-billion between 2015/16 and 2017/18, despite the government raising excise taxes annually for several years in a bid to discourage smoking while collecting revenue.

"As the cost of cigarettes increases – due mainly to the excise taxes being raised each year – consumers are not giving up smoking, but instead simply switching to cheaper products which yield no tax at all,” said Dr Azar Jammine, director and chief economist at Econometrix.

Econometrix said its research, commissioned by British American Tobacco South Africa (BATSA), was borne out by a separate study conducted by global market research company Ipsos in 2018.

The study found that the top-selling cigarette in South Africa regularly sold for R10 per pack of 20, significantly less than the R17.85 minimum tax owed on a pack.

Cigarettes selling below this minimum price were found in three out of four non-organised shops by Ipsos, totalling 100 000 outlets, and these shops accounted for almost 80% of all tobacco sales.

“Considering the high price elasticity for tobacco products, holding excise at current levels is the only way to prevent further erosion of the tax base, while enforcement measures are implemented to curb the illicit tobacco trade,” Jammine said.

Based on the same price elasticity of demand, Econometrix estimated that holding tobacco excise taxes in 2019/20 would result in the same excise collection as anticipated for the current financial year.

"By contrast, Treasury will lose R1.1-billion more revenue from BATSA alone than if excise is increased by expected inflation of 5.4% and manufacturers pass on the increase to consumers – because consumers switch to illegal cigarettes,” said Jammine.