The danger facing the cannabis industry under a new commercial framework is that it will be taxed to death.
Although no details have emerged as to what a new cannabis tax regime will finally look like, the DTIC is believed to have been in talks with Treasury to work out how Government is going to get its share of a market that’s generating perhaps R30 billion a year.
New mandatory levy coming for call cannabis license holders
One of the recommendations in the DTIC’s draft cannabis commercialization policy is that the licensing net be widened to include retail, and that all cannabis license holders will be obliged to pay a new annual levy to finance a government-controlled cannabis industry development fund. This new fund will support ‘designated groups’ and pay for harms reductions programmes.
The first draft of the DTIC’s cannabis commercialization policy circulated six months ago, called for a new licensing system to be fast-tracked and placed under the control of a new regulatory body. It said stakeholders would be consulted on the composition of the new Cannabis Regulatory Authority which will be catered for in a new ‘omnibus’ cannabis law expected to come into effect in 2027.
The new law will incorporate the cannabis commercialization policy which the DTIC is drawing up. It forsees an expansion of licensing into the retail arena as well as for cultivation, manufacturing and export. All existing license holders will be required to reapply for their licenses, and the new licensing system will be a revenue source for government to fund harms prevention programmes and industry development.
Point 4.17 in the draft read as follows:
“The establishment of Cannabis Industry Development Fund is proposed. Annual contribution to the Fund will be made by all cannabis licencees (excluding hemp licences). Levies can be charged to deal with harmful effects of cannabis. Departments of Social Development (DSD) and Correctional Services (DCS) will assist with the costing of the harmful effect in order to determine the contributions that need to be paid to the fund. The Fund will primarily be used for supporting the promotion and development of social and economic programmes in the cannabis industry as well as development of new
products in the sector. The Fund will also contribute towards the development of the industry and supporting participation of designated groups. Contribution to industrial development”.
Expect stricter controls
The gist of the Department’s approach is summed up in the document as follows:
“Finally, it is the intention of this draft commercialization policy to maintain the plant’s legal status while introducing stricter controls. The policy takes notice of the fact that despite cannabis being largely legalized, regulatory frameworks are still evolving.
“Government has to implement a series of interventions to regulate the cannabis industry, transitioning from a period of near-total decriminalization to a more controlled approach. These interventions aim to balance the potential economic benefits of cannabis with public health concerns and potential misuse.”
The commercialization document sees the private sector getting a seat at the policy-making table through the establishment of a new body which will presumably replace the currently defunct National Cannabis Master Plan steering committee. Here’s the outline:
* “Establishment of a multi-sectoral stakeholder coordinating committee on hemp and cannabis is proposed. It will serve as a co-ordinating structure involving government, industry, labour, consumers, non-governmental organisations (NGOs) etc, on matters involving commercialisation of hemp and cannabis.
* “Establishment of an implementing agency of the policy in the form of a licensing authority is proposed and such establishment of this agency must be accelerated. This authority will be responsible for administrative implementation of the policy and will largely deal with matters such as development of national register of licensees, registrants, processing and issuing of
licences, processing of applications for exemptions.
* The appointment of a ministerial advisory committee on hemp and cannabis commercialisation, establishment of a multisectoral stakeholder coordinating committee on cannabis and establishment of an implementing agency of the policy in the form of a licensing authority
* Businesses involved in cultivation, sales, or exports must secure new licenses, categorized by cultivation scale (small, medium, or large). The established cannabis regulatory authority must be empowered to enforce compliance.
The draft policy has developed through several versions and its finalization will coincide with the publication of regulations for the Cannabis for Private Purposes Act of 2024 (CfPPA) which has also been gathering dust in the legislative backrooms.
Next four months are crucial
The next four months will determine the future of cannabis commercialization will look like as DTIC Minister Parks Tau has signalled that finalizing the cannabis commercialization policy is an immediate focus going into the new year, as well as a review and refinement of the National Hemp and Cannabis Master Plan.
The draft policy is either in his inbox, or that of his director-general Simphiwe Hamilton and will be presented to Cabinet in April and for public comment thereafter. The regulations that will give force to the CfPPA are being finalized by the Department of Justice, which has gone on record promising these will be circulated for stakeholder and public input around the end of February.
The end of February will also feature a post-prohibition policing summit organized by Fields of Green for All. Representatives of cannabis communities affected by policing have been invited to attend a workshop in Johannesburg to make their voices heard on shaping future SAPS policy.
These developments will shape how the rest of the year unfolds from a cannabis perspective. Once the CfPPA regulations have been gazetted, cannabis will be removed from the Drugs and Drug Trafficking Act. Although there will still be penalties for dealing in cannabis, these will be governed by the Medicines Act.
At the end of the day the cannabis commercialization policy is all about the legalization of dealing in cannabis and what government is going to take as its cut.
The danger of legalization is that licensed cannabis businesses will be over-taxed and there will be no incentive for ‘Grey Zone’ operators to become compliant. The ‘Grey Zone’ remains largely beyond the VAT net – private clubs don’t pay VAT because transactions are not sales but membership benefits, while completely non-compliant operators ignore VAT and their ‘tax’ is often to law enforcement officials to look the other way.
Government’s approach to how it will tax the industry will be the next make-or-break moment in South Africa’s troubled transition to a legal cannabis sector. There are potentially over 10 000 businesses that could become new SARS clients once the new laws are in place, and the government will have to tread a fine line between exacting its due and providing the tax breaks to stimulate the industry.
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