South Africa’s government is creating a new illicit economy

South Africa is facing renewed concerns about the growth of illegal economic activity, with government policies and regulatory failures drawing scrutiny over whether they are creating opportunities for illicit markets to expand.

The issue raises important questions about how the state regulates businesses, collects taxes and enforces the law, particularly in sectors where high costs, complicated rules and weak enforcement can encourage people to operate outside the formal economy.

An illicit economy includes activities such as illegal trade, tax evasion, smuggling and the sale of goods through unauthorised channels. These activities can undermine legitimate businesses reduce government revenue and make it harder for authorities to protect consumers.

Government regulations are intended to protect the public ensure fair competition and generate revenue for essential services. However, poorly designed rules or inconsistent enforcement can have unintended consequences.

When compliance becomes expensive or difficult, some businesses may attempt to avoid taxes, licensing requirements or other legal obligations. If enforcement is weak, illegal operators can gain a cost advantage over companies that follow the rules.

This creates an uneven playing field for legitimate businesses which must continue paying taxes and meeting regulatory requirements.

The relationship between regulation and illicit activity is complex, however. Illegal markets can also grow because of organised criminal networks, corruption, inadequate policing and strong consumer

South Africa’s government is facing warnings that its taxation of vaping products could encourage the growth of an illicit market, potentially undermining legitimate businesses and reducing the tax revenue it hopes to collect.

The concerns centre on the excise duty imposed on electronic nicotine and non-nicotine delivery systems, commonly known as vaping products. Industry stakeholders argue that the tax is too high and could push consumers towards cheaper unregulated alternatives.

The National Treasury began exploring taxation of vaping products in 2020 amid growing international concerns about their health effects.

Following public consultations, government introduced a flat excise duty of R2.90 per millilitre of vaping liquid, effective from 1 June 2023.

The tax has since increased annually in line with inflation. In the February 2026 Budget, it rose to R3.29 per millilitre.

Industry representatives argue that the rate is too high relative to the perceived health risks of vaping compared with conventional cigarettes.

They have called on government to reduce the duty and adopt a tobacco harm reduction approach, arguing that lower taxes could encourage some smokers to switch to vaping products.

However, these claims remain contested, and health organisations have warned that vaping is not harmless.

South Africa already faces a substantial illicit cigarette trade.

Daily Investor reported that illegal products account for an estimated 75% of the local cigarette market. Industry stakeholders fear that vaping products could follow a similar path if legal products become too expensive.

Illegal products can enter the market through informal supply chains, smuggling and sales that bypass tax and regulatory requirements.

Such products may lack proper quality checks, ingredient disclosure or regulatory approval, creating potential risks for consumers.

Legitimate manufacturers and retailers also face an uneven competitive environment when illegal sellers can offer products without paying the same taxes or complying with the same rules.

South Africa’s vaping market has expanded despite the introduction of excise duties.

Market research firm P&S Market Research estimated that the country’s electronic cigarette market was worth approximately $204.4 million or R3.39 billion in 2025.

The firm projected that the market could reach $410.2 million, or R6.81 billion, by 2030, representing an annual compound growth rate of 15%. These are market estimates, not guaranteed outcomes.

The market’s growth creates an opportunity for legitimate businesses, but it also increases the importance of effective tax collection and enforcement.

The National Treasury acknowledged the concerns raised by industry stakeholders but noted that the excise duty on vaping products had only recently been introduced.

Government must weigh the potential revenue from taxation against the risk that excessive tax burdens could encourage consumers to purchase illegal products.

Reducing the tax could make legal products more competitive, but it would not necessarily eliminate illicit trade. Weak enforcement regulatory uncertainty and demand for cheap products can also contribute to illegal markets.

The health implications are another important consideration. The Cancer Association of South Africa has warned about risks associated with vaping, including nicotine addiction and potential lung damage.

The debate comes as South Africa works to combat illicit trade across tobacco, alcohol, fuel and counterfeit goods.

The South African Revenue Service has estimated that the broader illicit economy drains between 5% and 8% of the country’s gross domestic product. SARS says this activity threatens legitimate businesses, employment and government revenue.

The government has established a National Illicit Economy Disruption Programme to coordinate enforcement across high-risk sectors.

The challenge is to ensure that tax policy does not unintentionally make illegal products more attractive while still protecting public health and collecting revenue.

Ultimately, whether South Africa’s vaping tax creates a larger illicit market will depend on consumer behaviour, tax policy, regulatory clarity and the effectiveness of enforcement. The industry’s warnings have raised an important question, but the extent of any resulting black market will need to be established through evidence.

Sources: South Africa’s government is creating a new illicit economy – Daily Investor

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