Failure to end the illicit cigarette trade has cost country billions

• Sales ban created opportunity for illegal manufacturers and traders to expand operations

When smokers buy cigarettes they are faced with a large selection of brands, with prices ranging from less than R20 a pack to more than R50.

There is no obvious difference in quality. The excise tax on cigarettes is R21.77 a pack. If one accounts for manufacturing costs, profits, wholesale and retail margins and VAT, any pack that is sold for less than R32 is most likely illegal (tax evaded). Do smokers buy cheap cigarettes, knowing they are illegal?

We don’t know the proportion of SA smokers who know that the cheap cigarettes they buy are illegal. But we are confident that the illegal cigarette market is enormous: 58% of the total market in 2022. Based on Treasury revenue data, the illicit trade was over 60% in 2023.

These tax-evaded cigarettes have lost the SA Revenue Service (Sars) billions of rand in revenue, money that could have been spent on education, the healthcare system or the development of infrastructure.

Our research shows that in 2022 alone Sars missed out on R14.5bn in excise tax revenue and R3.3bn in VAT revenue as a result of illegal cigarettes. This translates to an additional 1% of total revenue had it been collected.

How did we get to a situation where substantially more than half of cigarettes sold in SA are illicit? It didn’t happen overnight.

Over time, consumption has been increasing, while excise tax collection by Sars has been decreasing. Things began to unravel in 2010, and deteriorated sharply in 2020 when the government banned the sale of tobacco products for five months.

We estimate that the illicit cigarette market comprised 5% of the market in 2009. In 2019 it was 40%, shot up to 58% in 2020 because of the sales ban, peaked at 60% in 2021, and decreased marginally to 58% in 2022. The evidence indicates that the sales ban resulted in an 18-20 percentage point increase in illicit trade by creating an opportunity for illicit manufacturers and traders to greatly expand their operations. Many smokers switched to illicit brands during the sales ban and never switched back after the ban was lifted.

So how much did the fivemonth tobacco sales ban in 2020 cost the country in terms of foregone excise and VAT? If we assume that the 2019 figure of R11bn in lost revenue had stayed the same in 2020-22 (in the absence of a sales ban), the government would have received an additional R18.9bn. (All figures are in constant 2022 prices.)

DISASTROUS

If we look at a longer period from 2002 to 2022, the total lost excise and VAT revenue is estimated at R119bn. Most of the revenue was lost from 2010 to 2022 — R110bn in excise and VAT revenue combined. The effect on the fiscus has been disastrous. The green bars in the figure show the excise revenue lost (R14.5bn in 2022, for example) and the grey bars show the VAT revenue lost (R3.3bn in 2022) as a result of illegal cigarettes.

Aside from the fiscal losses, the public health effect of cheap cigarettes is alarming. Results from a 2022 publication indicate that smoking caused about 31,078 deaths in SA in 2012. Cheap illicit cigarettes make it easy for smokers who might otherwise consider quitting to continue their lethal habit.

The relatively low price also encourages more young people to try smoking. Reducing the availability of illicit cigarettes is therefore critical for public health.

Aside from the lives lost to smoking, the economic costs are alarming. A 2021 paper found that the economic cost of smoking in SA in 2016 was R42bn, of which R14.48bn was for healthcare costs. Moreover, the illicit trade also supports organised crime, helps enable official corruption and erodes state structures.

After Tom Moyane’s destructive years as head of Sars (2014-18) the service reduced the illicit trade in the 2018/19 financial year. In 2019 Sars issued a tender requesting proposals for a track-and-trace solution for cigarette products from companies independent of the tobacco industry. After multiple delays, Sars cancelled the tender in May 2020.

PROTOCOL

Despite many appeals by academics and civil society organisations, SA has not ratified the Protocol to Eliminate Illicit Trade in Tobacco Products. The protocol is an international treaty that aims to eliminate all forms of illicit trade in tobacco products. Countries that ratify the protocol commit to implementing, among other things, licensing requirements for all producers in the tobacco supply chain, and a track-andtrace system to monitor the flows of tobacco products.

If Sars does not secure the supply chain from the point of production to the point of sale, SA will continue to lose valuable revenue.

Dr Vellios is a senior research officer at the economics of excisable products unit at the University of Cape Town.. Prof Van Walbeek is director of the unit. This article is based on research funded by the Bill & Melinda Gates Foundation, through the African Capacity Building Foundation.