Smoking in South Africa will never be the same again – taxes, laws and more

Market disruptors such as e-cigarettes have had a significant impact on the smoking industry in South Africa, leading to changes in government regulation and taxation. Starting from 1 June 2023, nicotine-substitute solutions, including vaping products, will be taxed at a flat excise duty rate of R2.90/ml, which is a move by the government to extend the tax net over developing and new smoking methods in the country. However, the introduction of this tax has been met with concerns from the largest player in the tobacco space, British American Tobacco (BAT), as well as the Vapour Products Association of South Africa. They have warned that the new tax will likely end up pushing prices up by as much as 138%, forcing consumers to the illicit market.

Currently, vaping products are not covered by the Tobacco Products Control Act or the Medicines Act, but legislation is in the pipeline to address regulatory holes concerning the practice. The Tobacco Products and Electronic Delivery Systems Control Bill, which aims to further regulate smoking and the smoking industry, including e-cigarettes, is being considered by Parliament. Through the bill, when it becomes an act, the minister of health will be given authority to designate certain public places and outdoor areas as no-smoking zones and to regulate the packaging and advertising of tobacco products. The bill also includes a provision to ban the display of all tobacco products, as well as e-cigarettes, vapes, and heat-not-burn products, in retail settings, including speciality tobacco stores.

New methods, including vapor, tobacco-heating, and modern oral products, all pose less harm to consumers, which will have an impact on the traditional tobacco market. Most large market regulators saw that the vaping industry’s regulatory advantage would not stay forever, leading to significant developments in the e-cigarette space. Big Tobacco is now encouraging smokers to quit or switch to next-generation products via various consumer education initiatives. These products are all relatively new, and the current science regarding harm reduction has been positive, showing as high as a 90%-plus reduced risk of exposure to harmful substances.

While the potential decline in tobacco sales is a concern for industry heavyweights such as British American Tobacco, if long-term combustible volumes do not decrease significantly and real price increases are achieved, companies like BAT could see growth in revenue and margins. The decline in smoking prevalence has not had a noticeably large impact on tobacco industry earnings yet, but it has caused the sector to trade on a lower multiple of earnings. However, risks associated with regulatory changes have increased, which were not a concern in the past, making tobacco investments less stable than they used to be. In conclusion, the smoking industry in South Africa is facing a significant transformation due to technological advancements and changing consumer behavior, which could lead to potential risks for tobacco companies.

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