National Treasury has issued a discussion paper on the "Taxation of Electronic Nicotine and Non-Nicotine Delivery Systems". Electronic nicotine delivery systems (ENDS) and non-nicotine delivery systems (ENNDS) also known as e-cigarettes. E-cigarette devices broadly consist of a mouthpiece, battery, vaporizing chamber (with or without a heating coil) and a cartridge that contains a liquid solution, flavorings and other chemicals (e.g., nicotine). The battery-powered device vaporises the liquid solution to create an aerosol which is inhaled and exhaled by users to simulate the act of smoking commonly referred to as vaping.
The discussion paper proposes the introduction of a specific excise tax on of nicotine and non-nicotine solution in 2022. The proposed excise tax will be levied, collected and administered under the Customs and Excise Act 91 of 1964 (the Act).
Background
The South African Government has introduced various measures aimed at reducing the consumption of tobacco products. There are now new generation products (NGPs) available in the market. NGPs are harm reduction or reduced risk products. These products include e-cigarettes and heated tobacco products (HTPs) which are more popular with younger people.
Governments around the world have started regulating and imposing a tax on. However, the country is in the process of changing the status qou. Back in 2018, the Draft Control of Tobacco Products and Electronic Delivery Systems Bill was published to repeal the current Tobacco Products Control Act 83 of 1993. Recently, the Minister of Finance announced South Africa's intention to publish a discussion paper on a proposal to tax e-cigarettes. We discuss the key considerations for importers and manufactures of e-cigarettes in South Africa and provide a view on the possible implications.
Key considerations in the implementation of the tax
The discussion paper considers the following issues in the appropriate design and instrument to be used in implementing the tax on e-cigarettes:
- The type of instrument – National Treasury is of the view that a specific excise regime is appropriate for the taxation of e-cigarettes. Unlike ad valorem excise duties which is based on the value of the excisable product, a specific excise regime is based on volume/weight much easier to administer.
- The coverage and base – Given the nature of e-cigarettes, luxury or non-essential products, the government should consider an ad valorem duty on e-cigarettes with a focus on both the liquid solutions base (non-nicotine) and nicotine content. Excise tax will be levied on the volume of the non-nicotine measured in milliliters (ml) and the nicotine content solution measured in milligrams (mg).
- The excise structure – For purposes of minimizing the administrative costs on the tax system and to reduce the compliance burden on taxpayers, a flat rate is recommended as opposed to a progressive or tiered rate structure. Liable manufactures will be required to obtain and retain nicotine content certification or a South African National Accreditation System (SANAS) or International Laboratory Accreditation Cooperation (ILAC) test report to be produced on request or at the time of import, as may be applicable.
- The excise duty rates – National Treasury has looked at several options regarding the applicable excise rates for e-cigarettes. The options considered include: (a) The 40% benchmark – the excise duty equivalent to 40% of the price of the most popular brand in each tobacco category; (b) Cigarette equivalence- using the number of cigarette equivalence for the determination of the excise rate; (c) Introductory rate – 60 cents per milliliter on the volume of the liquid solution plus 30 cents per milligram for the nicotine.
Conclusion
Globally, several countries impose a tax on e-cigarettes. The issuing of this discussion paper indicates intention to introduce excise tax to be levied, collected and administered under the Customs and Excise Act 91 of 1964. In view of the above discussion.
- A requirement for manufactures of e-cigarettes to register as excise clients and license a customs and excise manufacturing warehouse with the Customs division of the South African Revenue Services (SARS). Registration with SARS is once off. However, licensing may be subject to renewal on or before 31 December of each year. Other than the obligation to register as importer, no additional registration and/or licensing requirements on importers.
- Where a specific excise tax is implemented, manufactures may be required to prepare and submit monthly or quarterly returns via the SARS eFiling platform and make payment if due. Additionally, should a corresponding ad valorem excise duty apply, importers will be required to pay the applicable excise duties at the time of import.
- The ILAC or SANAS test report requirements for both local manufactures and importers will add additional costs, over and above the excise duties, to the selling price of e-cigarettes in South Africa.
In our view, National Treasury has the unenviable task of implementing atax regime that is both administratively feasible for SARS and for the taxpayer. The more complex the administration, the higher the cost of compliance on the taxpayer. A complex tax regime may have the unintended consequence of discouraging compliance.
Moreover, South Africa is following the rest of the global community in imposing taxes on e-cigarettes. All indications point to the tax being implemented on or before the end of 2022 . Taxpayers should keep a close eye on developments in this area and should factor ongoing discussions in their strategic outlook going forward.
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