Reference: Published by Staff Writer, 8 May 2023

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

E-cigarettes and other market disruptors have changed how South Africa’s government controls and levies taxes on smoking.

From 1 June 2023, nicotine-substitute items, including as vaping products, will be subject to a flat excise duty rate of R2.90/ml, demonstrating the government’s keen effort to expand the tax net to include emerging and novel smoking behaviors in the nation.

The Vapour Products Association of South Africa and British American Tobacco, the largest participant in the tobacco industry, have cautioned that the increased tax will probably result in price increases of up to 138%, driving users to the black market.

The Tobacco Products Control Act and the Medicines Act do not now encompass vaping products, but legislation is being prepared to close any remaining legal loopholes.

The Tobacco Products and Electronic Delivery Systems Control Bill, which was introduced at the end of 2022 after considerable consultation, is now being debated in Parliament.

In general, the law seeks to tighten regulations on e-cigarettes as well as smoking in general.

When the bill is passed into law, the minister of health will have the power to impose smoking bans in specific public venues and outdoor spaces as well as to control tobacco product packaging and advertising.

The law also has a clause that prohibits the exhibition of any type of tobacco product, including heat-not-burn items like e-cigarettes and vapes, at retail establishments like specialty tobacco stores.

Similar to government control, equity analysts Siphesihle Zwane and Varshan Maharaj of Allan Gray claimed that the tobacco industry never paid much attention to novel nicotine use methods.

According to Allan Gray, “the industry never aggressively invested in new ways to consume nicotine.”

This changed when JUUL, a popular vape brand, started to experience rapid growth in the US thanks to the introduction of flavor-infused new products and clever marketing strategies. Due to the surge in “JUULing,” incumbents were obliged to invest more in next-generation products (NGPs), which marked a significant departure from the industry’s previous stability.

Modern oral products, tobacco-heating, and other new ways all aim to reduce consumer harm, which will unavoidably have an impact on the traditional tobacco business.

The majority of major market regulators, according to Allan Gray, recognized that the vaping industry’s regulatory edge would not last indefinitely. The abundance of advancements in the e-cigarette business at the moment is evidence of this.

According to the equity analysts, Big Tobacco is currently pushing smokers to give up or, if they are unable to, switch to next-generation products through a variety of consumer education activities, such as storefronts in malls.

“These products are all very new, and the latest research on damage reduction has been encouraging, demonstrating a risk reduction of up to 90% or more from exposure to dangerous compounds. To better understand the long-term effects, demographic studies are being undertaken, but we are still keeping an eye on the science, according to Allan Gray.

Investments in the tobacco industry, which was once a dependable sector for decades, now carry higher risks as a result of significant industry upheavals.

The risks linked to legislative reforms have not yet significantly impacted the tobacco industry’s earnings, but they have led to a lower multiple of earnings for the sector, according to Allan Gray.

Heavy hitters in the business like British American cigarette are worried about the potential reduction in cigarette revenues because smoking rates have declined while the population has increased.

However, businesses like BAT might experience revenue and margin expansion if long-term combustible volumes do not decline sufficiently and real price increases are realized.

Allan Gray said that when more consumers switch to Next Generation Products (NGPs), profit per stick may increase. The number of smokers has remained constant since 1990 at between 1 billion and 1.1 billion, notwithstanding the fall in smoking prevalence.