The alcohol and tobacco duty-free quotas for South African diplomats remain in place following a majority judgment by the Constitutional Court.
These restrictions were implemented after the South African Revenue Service (Sars) calculated revenue losses of around R100 million per month due to “rogue diplomats” who bought “exorbitant” amounts of alcohol and tobacco duty-free only to sell it in the domestic market for personal gain.
The quota system was implemented following amendments to the Customs and Excise Act and the Value-Added Tax Act.
Diplomats are now only allowed two 30-cigarette packs, one bottle of wine, 400ml of spirits and slightly more than 340ml of beer per day. The quota is reviewed every six months.
South Africa’s four licensed duty-free retailers – Nu Africa, Ambassador, Flemingo and Assortim – took the amendments to the acts as well as the constitutionality of certain sections of the acts on review before the Pretoria High Court.
The retailers contended, among others, that the amendments, as well as the decision to make the amendments, could be reviewed and set aside on legal grounds. They argued that the process leading to the introduction of the quota system was arbitrary, irrational and procedurally unfair.
The minister of finance contended that the amendments were rational and were intended to curb the abuse of the privileges by rogue diplomats.
He also took issue with the contention that the process was unfair, noting that there had been proper notice of the intention to amend the relevant schedules to the acts. He argued that the retailers had an opportunity to make representations.
The high court found in favour of the retailers, set aside the amendments, and declared the sections of the act as invalid and inconsistent with the Constitution.
However, Judge Rammaka Mathopo, in a majority decision, did not confirm the high court’s order to declare sections of the acts unconstitutional – but did grant Sars and the minister of finance direct leave to appeal the high court order that set aside the amendments. Their appeal was subsequently upheld.
In a minority judgment, Judge Owen Rogers found that the minister did not follow a rational process in amending the schedules to the two acts.
It would be “just and equitable” to suspend the setting aside of the amendments to the schedules and rules for a period that will give the minister and commissioner adequate time to investigate appropriate quantitative restrictions and consult adequately with the retailers before promulgating fresh amendments, he found.
Rogers also criticised the way the quantitative limits were decided. If a minister relies on material that is nonsensical or “gobbledygook” the resultant decision cannot be rational.
“To borrow computer modelling’s colourful acronym, this is the GIGO principle: garbage in, garbage out’.
“The position is even worse in the present case – we do not even know what information was before the minister when he took his decision, because nobody has told us,” said Rogers.
He found that the quota system was “in principle” a rational response to the abuse, even if it was not the only rational response available to the authorities.
“But if there has to be a single, perhaps generous, limit applicable to all diplomats and missions, the only consequence is that a diplomat buying products in excess of those limits will have to pay duties and taxes on the excess. The sky won’t fall.”
The minister and Sars identified abuse in the system around 2019. Sars alerted the retailers to the abuse that was uncovered and then “forewarned” them about the prospective changes to the regulatory process concerning the introduction of a quota on alcohol and tobacco products. These changes would usher in a dramatic change to the system.
The draft amendments were published, and only one of the duty-free shops commented on them.
The amendments took effect in August 2021. Ambassador then launched an application asking the high court to review and set aside the decisions of the minister and the Sars commissioner to amend the schedules and rules to the acts. Flemingo and Assortim asked for similar relief.
Nu Africa asked for more radical relief – it wanted an order declaring parts of the two acts inconsistent with the Constitution.
In terms of the constitutionality, Nu Africa argued that the minister violated the ‘separation of power’ principle when he amended the schedules.
They relied on previous case law which found that it was constitutionally impermissible for parliament to delegate “plenary law-making powers” to the executive.
Mathopo said Nu Africa’s argument meant that it was automatically unconstitutional for any act of parliament to empower a member of the executive, such as minister, to amend a schedule to the act. That was not correct, he found.
“Quite often, fiscal policy demands that fiscal measures be implemented as soon as the loophole has been determined to prevent people from taking advantage of the situation. In this case, if Parliament were to be approached first, errant diplomats would have free rein and the mischief sought to be prevented would continue unabated.”
Judge Mathopo also upheld the appeal by Sars and the minister against the setting aside of the amendments on the grounds of irrationality.
“It cannot be argued that a limit on alcohol consumption of 72 litres per six months (equivalent to 400ml per day) is an irrational estimate of what consulates may need for official use.”
He contended that consulates did not have official cause to serve alcohol every day.