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SA’s Top Tax Professional: Cannabis Tax could be a Gold Mine But Government is Squandering its Opportunities

Govt has failed to exploit the massive untapped market

Cannabis tax could be a gold-mine for South Africa but government is squandering its opportunities. That’s according to says Ettiene Retief, chairman of the National Tax Committee at the South African Institute of Professional Accountants (SAIPA).

Retief said that, unfortunately, the government had so far failed to exploit a massive, untapped market for recreational cannabis consumption, both locally and globally. He was interviewed by BusinessTech on 21 October 2021, and Cannabiz Africa picks up on his points as they are more relevant today than ever.

“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. We are seeing a similar trend in other countries as governments realise that, with the right controls, recreational and medical cannabis can be exceptionally lucrative,” said Retief.

His calls follow last year’s appeal by former Finance Minister Tito Mboweni that legalizing cannabis could earn the fiscus R4 billion from the Eastern Cape alone.

 

Cannabis is open to a raft of taxes

Retief cited the success of the US state of Colorado which in 2012 voted to legalize full adult use. He said that in the decade since, Colorado has  seen over $10 billion in total legal sales and, in the last six years, tax on the product has amounted to over $1.6 billion at the state level alone.  He said revenue resulted from a 2.9% sales tax on medical and recreational sales and a 15% excise tax when the cannabis leaves the grower. This excludes tax on industrial hemp, which the state legalised in 2010.

“This is just the beginning” said Retief. 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.

“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: consider special zones where cannabis can be consumed legally

Retief noted that South Africa was already a significant 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 said

The biggest constraints to legalising marijuana for recreational use are traditional assumptions about its dangers to society, its reputation as a gateway drug, and protective laws.

“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, Retief said.

“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.”

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