Tobacco case provides lessons for potential sugar tax

IBEGAN last week chairing a panel discussion on the proposed sugar tax and ended it with an interview with British American Tobacco’s (BAT’s) new South African CEO.

The comparisons and contrasts between the two “sin tax” products raise intriguing questions about the best instruments to tackle the health hazards they cause, as well as about the unanticipated consequences that can result if governments get it wrong.

The tax that SA’s government proposes is not strictly a sugar tax, but a tax on sugar-sweetened beverages, which would add about 20% to the price of a can of Coca-Cola, making SA’s sugar tax the world’s highest.

Coincidentally, the new sugar tax would raise about the same in revenue for the state, at R4bn-R5bn annually, as the illicit tobacco trade is estimated to lose to the state each year.

Listening to one packaging industry executive who attended the panel discussion at Wits Business School, I wondered if a bunch of Coca-Cola smugglers, or illicit Fanta manufacturers might spring up to avoid the sugar tax and the value-added tax (VAT) on sugar-sweetened drinks, just as they have done in the tobacco industry. The executive asked why, if the government wanted to tax sugar, it did not simply do so at the sugar factory gate, as it were.

He argued that the proposed tax on drinks would be impractical and impossible to police, as smaller manufacturers would simply bypass it.

That is pretty much what happened in SA’s tobacco industry, where according to the new book, Rogue, by former South African Revenue Service (SARS) executives Johann van Loggerenberg and Adrian Lackay: “By 2013 tobacco smuggling had reached epidemic proportions. A host of small local manufacturers, wholesalers and importers had sprouted up across SA and they were raking in billions, while the state was not receiving the revenue it was due from excise, income tax, VAT and customs duties.” The illegal tobacco trade and the dodgy dealings within and between the various factions (at BAT) trying to combat it (or claiming to try combat it), caused huge damage to SARS and led to the departure of tens of its most skilled executives, as Rogue describes.

Which is why the new BAT SA CEO, Soraya Zoueihid, has launched an investigation into BAT’s alleged role in the debacle and has ceased all BAT’s anti-illicit tobacco activities. Combating the illicit trade should be a priority, in her view, but it has to be done in the right way.

SA’s illicit trade, at 24% of all tobacco sold, is double the global average. It jeopardises the fiscus, as well as undermining public health objectives, making cheap cigarettes available to poorer people and under18s. Zoueihid says tobacco consumption in SA is flat to slightly down, but she reckons it might have decreased much further if not for all those cheap cigarettes.

BAT argues too that the “plain packaging” rules, which SA’s Department of Health is keen to introduce, would make the problem even worse, because with branding removed, the competition would be just on price — and the untaxed goods would have a clear advantage. That’s been the case in Australia, apparently, where plain packaging has increased the illicit trade significantly.

Smaller cigarette manufacturers in SA have accused BAT of trying to shore up its own dominant, but declining, market share with its war on illicit tobacco, and that may have been the case — ideally the company will go public with the results of its investigation. One wonders, though, why smaller manufacturers didn’t resort to the competition authorities if they did have a case?

The tax on tobacco has helped to cut consumption 45% since 1994, according to Dr Yussuf Saloojee, of the National Council Against Smoking, and the tax on sweetened beverages would no doubt do the same in that industry, with the debate more about whether this is the right instrument, with the right design, to combat SA’s obesity and diabetes problems.

At the proposed 20%, the tax on fizzy drinks would be nothing like the taxes (excise and VAT) on cigarettes, which total R15.10 on a pack of 20 cigarettes. Those packs are priced at about R22 in the formal retail trade — but at as little as R7-R10 in the informal sector. If there were the kinds of control measures on tobacco production that other countries have to ensure nothing comes out of a factory or warehouse without the tax being levied, the illicit trade could be more easily controlled.

So, it’s far too early to start anticipating that the sugar tax could all go horridly wrong and bring out the dodgy dealers. But there are lessons from the tobacco case that the government should look at if it wants to avoid negative consequences and design a sugar tax that improves public health in the most effective way, with the least side effects.

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Joffe is editor at large.