Tax going up in smoke

Lack of enforcement by the South African Revenue Services (SARS) has resulted in alarming increases in contraband cigarettes and contributed to a 30% shortfall in the collection of excise duties.

An estimated R1.2bn in cigarettes and tobacco-specific excise tax was not collected by government in the first half of the year. Excise tax on cigarettes and tobacco products is paid on the basis of volume-declaration by manufacturers.

The minimum collectable tax on a packet of 20 cigarettes, specifically excise, and 14% VAT on the excise value, is R16.30. At least 15% of cigarettes sold in SA cost below R16.30. In some areas, locally manufactured cigarettes sell for R6.50 for a packet of 20 cigarettes.

These prices cannot be sustained. More so during economic stagnation as manufacturers would be absorbing part of the minimum collectable tax and the cost of production. Given that the Japan Tobacco International (JTI) global excise bill was 10 times its operating profit in the 2016 financial year, this raises questions on how this pricing can be sustained legitimately. In reviewing SARS’ performance for the first half of the year, serious questions must be asked. Assuming all manufacturers are audited regularly, we assume the revenue targets are realistic. SARS must explore whether declared volumes and the findings of its auditors are consistent, and what actions have been taken where inconsistencies have been identified.

The shortfall is recoverable if SARS continues auditing of all manufacturers and regulation is enforced. This will improve the collection of excise duties for tobacco products and help plug the R1.2bn gap.

Andrew Neumann

General manager, Japan Tobacco International