The South African Revenue Service has warned the National Treasury that a lack of funds is limiting its ability to push back against the syndicates behind the growth in the illicit economy, whose growth has outpaced the formal economy for more than a decade, reaching 10% of GDP.
In its 2026/2027 Annual Performance Plan, SARS highlights the growth of the illicit economy, with high-risk sectors being tobacco, alcohol, fuel, gold and crypto-related activities.
It said that during the medium-term expenditure process to 2026, SARS had submitted a request for fundamental reforms in response to the persistent structural deficit that had persisted during successive budget cycles.
Despite the “urgent need to restore funding to reflect the true cost drivers of SARS”, the initial allocation for fiscal 2027 has been cut by a further R76.6m, with an additional R157.3m cut the following year, the document said.
The performance plan states that underfunding will jeopardize SARS's ability to fully implement key modernization and enforcement initiatives, slow progress on critical digital infrastructure, analytics and AI capacity, and reduce the frontline capacity needed to combat illicit economic activities.
“Ultimately, this will impact SARS’s ability to improve administrative efficiency, reduce the tax gap, address tax and customs cross-border crime and secure much-needed revenues to support the government’s fiscal and developmental objectives.”
In response to questions from the Business Times this week, SARS said that unless the “material funding gap” is addressed, it does not have sufficient manpower or technical capacity to fully achieve its goals on digital modernization and the fight against illicit economic activities in the medium term.
“Skills are at the heart of digital modernization and modern enforcement models, but given the intense private sector competition for skills, under current remuneration constraints, they cannot be attracted and retained on a large scale,” SARS said in an e-mail.
It said key capacity constraints include the loss of scarce technical skills and inadequate capacity in enforcement and investigations.
The ban on legal tobacco and alcohol sales during the lockdown created a supply void that was quickly filled by organized crime
— Siphithi Sibeko
This hindered the tax agency's ability to target high-risk illicit sectors such as tobacco, fuel, liquor, cash-based activities, e-commerce and cross-border trade. “This directly contributes to the widening tax and customs compliance gap, increases fiscal risks and undermines the delivery of the macrofiscal objectives outlined in the medium-term budget policy statement.”
According to SARS data, illicit tobacco is the fastest-growing segment, with its market share increasing from 20%-25% in 2014 to almost 60% by 2021 – following smoking bans during the pandemic – and to 58%-75% by 2024-2025.
This causes a loss of Rs 15 billion to the exchequer annually. The economic damage caused by the increase in illicit tobacco was made clear by the decision earlier this year by British American Tobacco (BAT) to stop producing cigarettes in South Africa. BAT said the proliferation of blackmarket cigarettes in South Africa had made local production unviable.
At the end of the year the tobacco giant will close its Heidelberg plant, once the eighth largest in BAT's global network, which exports to several countries in the Southern Africa region. The plant is currently operating at only 35% of total capacity, making it unsustainable.
SARS also highlighted the problem of illicit liquor, which was causing a loss of approximately R11 billion to fiscal revenue – the highest figure among the seven African countries studied. It states that illegal products are often about 30% cheaper than legal alternatives, with significant public-health risks outweighing the economic losses.
Other activities and products that were robbing billions of rand of potential revenue included illegal blending of fuel, smuggling of gold and a range of counterfeit goods such as clothing, textiles, pharmaceuticals and foodstuffs.
SARS spokesperson Siphithi Sibeko said the weakening of the tax agency during the height of state capture had led to an increase in illicit trade.
“Between 2014 and the beginning of 2025, the illicit economy grew rapidly, outpacing legitimate economic growth and gaining deep roots. SARS and independent analysis… attribute this growth to the institutional weakness during the state-capture era (particularly 2014-2018), systemic border and customs corruption, cross-border syndication, and COVID lockdowns,” Sibeko said.
“The ban on legal tobacco and alcohol sales during the lockdown created a supply void that was quickly filled by organized crime. By the beginning of 2025, illicit activity was estimated to consume a significant portion of the legitimate economy, destroy jobs, fuel widespread criminality (including drugs and violence) and destroy social cohesion.”
Sibeko stressed that the agency is doing its best to fight the syndicates.
SARS last month executed search-and-seizure and protection orders against six current and former officials, clearing agents, importers and related parties. Their scheme involved rigging physical inspections in exchange for bribes, which identified more than R45m in undeclared income and approximately R18m in tax bias.
In collaboration with police, SARS conducted 23 operations in Gauteng, Mpumalanga and KwaZulu-Natal last year, finding almost 1 million liters of contaminated diesel fuel. In some cases the fuel had a paraffin content of up to 68%.
Sibeko said, “The illicit economy, once allowed to expand largely unchecked, is now subject to coordinated national disruption with visible consequences for syndicates and corrupt insiders. However, the challenge remains deep. Resource constraints persist despite increases in funding, and criminal networks continue to adapt.”
In the foreword to the performance plan, Finance Minister Enoch Godongwana says the country, still recovering from the economic fallout of the pandemic, is now heading into an uncertain future due to geopolitical tensions.
“We are also grappling with the scourge of illicit economic activities, which has an estimated cost to the economy of R700bn, (or) 10% of GDP annually. Illicit trade alone costs more than R100bn in revenue every year,” the minister says.
“These figures are not abstract; they represent stolen futures, wasted resources and broken public trust. We must therefore all unite in efforts to defeat this crisis. Tackling these challenges requires coordinated efforts between government agencies, including SARS.”
According to Euromonitor International data cited by Dr Shamal Ramesar, head of research at the Drinks Federation of South Africa, sales of illicit alcohol in South Africa are set to increase by 55% between 2017 and 2025.
“This study is a warning,” he said. “Communities are being exposed to harmful, unregulated alcohol and the country is losing billions of revenue. It is imperative that government, industry and civil society work together to tackle this issue.”
He said illicit liquor now accounts for 18% of total alcohol sold in the country, rising from R12.8 billion in 2017 to R25.1 billion in 2024.
Cosatu parliamentary coordinator Matthew Parkes urged the government to vastly increase efforts to combat illegal goods and customs fraud. “Illicit goods, from tobacco and alcohol to clothing and tyres, among other things, pose a serious threat to local jobs, businesses, value chains and communities.”
Additional reporting by Kabelo Khumalo