The South African government is finally beginning to acknowledge the extent of the illicit tobacco crisis. It has only taken years of lost revenue, thousands of threatened jobs, and the proliferation of criminal enterprises for policymakers to recognise what researchers and industry stakeholders have been warning for years.

In his 2026 Medium-Term Budget Policy Statement (MTBPS) last week, Finance Minister Enoch Godongwana identified illicit tobacco and alcohol as major concerns for the South African Revenue Service (SARS), outlining plans to strengthen enforcement and modernise customs and excise administration.

This acknowledgement is welcome, but it also raises the question of why the government has allowed the illicit tobacco market to grow so powerful in the first place.

South Africa is facing a weak economic outlook, with Treasury revising expected GDP growth down to 1.2% for 2026. While anticipated tax revenue has been revised upwards by R17.1 billion, much of this improvement is dependent on commodity prices that may not remain favourable.

Yet, while government struggles to balance its books and fund essential services, billions of rands in potential tobacco tax revenue continue to disappear into the illicit market.

An Illicit Market Hiding in Plain Sight

The latest Ipsos research, released earlier this month, reveals the worrying extent of South Africa’s illicit cigarette trade.

Of the 4 704 cigarette-selling outlets surveyed across all nine provinces, 75.4% offered cigarettes below the minimum collectable tax threshold of R27.12 per pack of 20. Even more concerningly, 65.3% offered cigarettes below the lowest economically viable price, with some packs selling for as little as R7.

Consider the absurdity of this situation. Excise duty alone amounts to R23.58 per pack of cigarettes. Including VAT, the minimum collectable tax threshold reaches approximately R27.12, before considering production, distribution, and retail costs.

Yet cigarettes are being sold for a fraction of this amount.

While low prices alone do not prove tax evasion in every instance, the widespread availability of these products is a glaring indication of the scale of the compliance problem.

This is not merely an assertion made by tobacco companies seeking to protect their market share. Research published in 2026 by the University of Cape Town’s Research Unit on the Economics of Excisable Products, using nationally representative 2021 survey data, estimated that nearly 60% of cigarettes consumed were likely illicit.

The problem is not confined to smugglers crossing our borders. Much of the illicit market involves locally and regionally produced brands, distributed through informal traders and increasingly finding their way into established retail networks.

The illicit tobacco industry is not hiding in the shadows. It is operating openly, competing directly with law-abiding businesses that are expected to pay their taxes and comply with the government’s increasingly burdensome regulations.

Government Helped Create This Crisis

The rise of the illicit cigarette trade did not happen overnight. It was accelerated by years of punitive regulation, excessive taxation, and the ludicrous decision to prohibit cigarette sales during the 2020 Covid-19 lockdown.

Rather than meaningfully curbing smoking, the prohibition forced consumers to seek alternative suppliers. Smokers discovered cheaper, untaxed brands and continued purchasing them even after the ban was lifted.

The government’s attempt to control the habits of South Africans effectively subsidised the expansion of an illicit industry.

This should have served as a warning against policies that ignore consumer behaviour and market incentives. Instead, government has continued to make legal cigarettes increasingly expensive while struggling to enforce the taxes and regulations already in place.

The result is a market where compliant manufacturers are punished for obeying the law, while their competitors enjoy the commercial advantages of ignoring it.

This has profound consequences for South Africa’s economy.

A 2024 study by Nicole Vellios and Corné van Walbeek estimated that illicit cigarettes cost the fiscus approximately R18 billion in excise and VAT revenue in 2022 alone. Between 2002 and 2022, estimated cumulative losses amounted to R119 billion in 2022 prices.

More recent industry estimates place annual excise losses as high as R30 billion. While these figures use different methodologies and cannot be treated as guaranteed recoverable revenue, they demonstrate the enormous fiscal consequences of widespread non-compliance.

The damage extends beyond tax collection.

In January 2026, British American Tobacco South Africa announced its intention to close its Heidelberg manufacturing facility by year-end, threatening approximately 230 jobs. The company attributed the decision to illicit competition, with its factory operating at only 35% capacity.

South Africa can hardly afford to lose more productive employment, investment, and legitimate businesses in an economy already struggling with unemployment and stagnation.

It does not matter whether one approves of smoking. The tobacco industry provides lawful products to willing adult consumers. Those businesses, their employees, and the consumers who support them deserve the protection of the rule of law.

And taxpayers deserve a government capable of collecting the taxes that its own legislation imposes.

Promises are not Enforcement

To its credit, National Treasury has recognised the problem and has begun taking steps to address it.

The 2026 MTBPS outlines SARS’s efforts to modernise customs and excise enforcement, including improved cargo scanning, track-and-trace capabilities, and stronger action against illicit networks. Godongwana also promised a more detailed update on the National Illicit Economy Disruption Programme in the February 2027 Budget.

While these are welcome developments, the government has made similar commitments before.

The 2025 MTBPS already acknowledged the enormous losses caused by illicit cigarettes, and SARS has undertaken investigations and suspended manufacturing licences.

Yet the latest Ipsos findings demonstrate that below-tax-price cigarettes remain readily available across the country.

Government announcements, enforcement operations, and new technology mean little if criminal enterprises remain capable of operating with impunity.

Enforcement of existing laws has its place. But SARS cannot be expected to police away every perverse incentive created by government policy, especially when those incentives encourage consumers to abandon the legal market in favour of cheaper, untaxed alternatives.

More importantly, government must reconsider whether its existing tax and regulatory approach is inadvertently making illicit products more attractive to consumers. Continuously increasing the burden on compliant businesses, while ignoring how these very burdens encourage consumers to support the illicit market, is not a sustainable fiscal strategy.

The objective should be a competitive, lawful tobacco market where regulations are reasonable, taxes are collectable, and legitimate businesses are not systematically disadvantaged by the government’s own policies. Reducing the incentives that sustain the illicit market is just as important as pursuing those who profit from it.

When Godongwana delivers the next Budget in February 2027, South Africans should expect measurable results. How much additional revenue has SARS recovered? Has the illicit market actually shrunk? And, perhaps most importantly, has government reconsidered the policies that have helped make illicit tobacco so attractive in the first place?

These are the questions that matter.

South Africa cannot afford to continue surrendering billions in potential tax revenue while legitimate businesses struggle to survive and criminal networks flourish.

The government has finally acknowledged the crisis. Now it needs to stop merely announcing solutions and start delivering them.

Nicholas Woode-Smith is a political analyst and Senior Associate of the Free Market Foundation. He writes in his personal capacity.