South Africa could be sitting on a tax revenue gold mine. This is according to Ettiene Retief, Chairman of the National Tax Committee at the South African Institute of Professional Accountants (SAIPA).
Unfortunately, the government has so far failed to exploit a massive, untapped market for recreational cannabis consumption, both locally and globally.
“Although I’m not an advocate of it, I cannot ignore the incredible growth this emerging industry is experiencing and the phenomenal potential it presents for taxation,” says Retief.
Retief cites the success of Colorado in the USA. In 2012, its citizens voted to legalise recreational marijuana use for adults. Since then, the state has seen over USD 10 billion in total sales and, in the last six years, tax on the product has amounted to over USD 1.6 billion at the state level alone.
Revenue resulted from a 2.9 percent sales tax on medical and recreational sales, and a 15 percent excise tax when the cannabis leaves the grower. This excludes tax on industrial hemp, which the state legalised in 2010.
Witnessing the sustainability of this new tax revenue stream in both Colorado and Washington, four more states voted last year to legalise cannabis – New Jersey, South Dakota, Montana and Arizona.
“We’re seeing a similar trend in other countries as governments realise that, with the right controls, recreational and medical cannabis can be exceptionally lucrative,” says Retief.
Benefits for South Africa
Apart from duties and VAT on the production and distribution of legalised cannabis, the so-called “sin tax” on cigarettes and alcohol could also apply to this similar product. And that’s just the beginning.
“Let’s not forget the vast supply chain that would emerge, the corporate tax on those activities, including imports and exports, taxable income from the jobs created, and much more,” says Retief.
For example, production and retail could extend into tourism – say in the form of “dagga safaris” that would bring much needed relief to the hospitality industry – or by-products like industrial hemp and compost.
Retief notes that South Africa is already a major cannabis producer with a thriving illicit market. “Legalising the sector will reduce crime, improve quality and safety, promote safer consumption, and regulate production while securing tax revenues,” he asserts.
A gradual adoption
The biggest constraints to legalising marijuana for recreational use are traditional assumptions about the dangers it poses to society, its reputation as a gateway drug, and protective laws.
Yet, almost a decade later, the population of Colorado has not been reduced to mindless zombies or heroin addicts. Of course, this does not eliminate the need for careful planning, the development of sensible regulation, education, and a prudent roll-out by the government.
A major consideration must be the acceptable legal age of users and how to protect minors from exposure. Health and safety standards and supply chain controls also need to be determined. Amendments to laws to address the risks, such as driving vehicles and being under the influence at work.
Lawmakers could at first utilise Special Economic Zones, not only to restrict manufacturing and sales to isolated areas, but also as unique tourist spots that would attract both overseas and local guests. This proof-of-concept approach would allow for gradual change instead of abrupt adoption.
In any case, the government needs to start consulting with stakeholders now to determine the best way forward. “South Africa is ideally positioned to take advantage of this tax revenue source and our cash-strapped state cannot afford to dismiss offhand such a sure bet,” concludes Retief.