To­bacco in­dus­try edgy over ‘sin tax’ re­view

CityPress - - Business -

The to­bacco in­dus­try “has no idea” what Trea­sury is plan­ning af­ter a re­view of the to­bacco “sin” ex­cise tax was qui­etly an­nounced in this week’s Bud­get Re­view.

The To­bacco In­sti­tute of South­ern Africa wel­comed the low in­crease in sin taxes for now, which keeps the “52% to­tal tax in­ci­dence” sys­tem in place.

Since 2002, the to­bacco in­dus­try, not govern­ment, has been re­spon­si­ble for steep in­creases in the sin tax.

The cur­rent sys­tem sim­ply sets the tax bur­den (in­clud­ing VAT) at 52% of the “rec­om­mended retail price” of the most pop­u­lar brand.

That is said to be Bri­tish Amer­i­can To­bacco’s Peter Stuyvesant brand, which has 30% or more of the mar­ket.

Bri­tish Amer­i­can To­bacco has in ef­fect – and in­di­rectly – been set­ting the “sin tax” on cig­a­rettes.

This has worked for govern­ment be­cause ma­jor com­pa­nies, of which Bri­tish Amer­i­can To­bacco is by far the largest, were ag­gres­sively push­ing prices higher un­til about 2010. This caused the tax rev­enue on cig­a­rettes to bal­loon from R4 bil­lion in 2002 to R13.1 bil­lion in the cur­rent fi­nan­cial year.

That’s with the num­ber of cig­a­rettes sold in the coun­try more or less stag­nant. How­ever, things have changed. When prices do not get hiked, the sin tax only goes up by the in­fla­tion rate – as it did in the Bud­get Re­view this week.

This al­lows Trea­sury to “pro­tect its rev­enue in case there is a sud­den de­crease in the price of cig­a­rettes”, said Corne van Wal­beek, prin­ci­pal in­ves­ti­ga­tor of the Eco­nom­ics of To­bacco Con­trol Pro­ject, which is based at the Univer­sity of Cape Town.

“This could hap­pen if there is a price war, for ex­am­ple. As it is, the to­bacco in­dus­try has been in some­what of a price war against the small oper­a­tors since 2010 and has in­creased cig­a­rette prices by more or less the in­fla­tion rate, not much more,” he added.

“This is very dif­fer­ent from the pe­riod be­fore 2010, when the to­bacco in­dus­try ag­gres­sively in­creased the retail prices, and Trea­sury did not have to use the se­cond prin­ci­ple [in­fla­tion rate] to in­crease the prices.”

Fran­cois van der Merwe, chair and CEO of the To­bacco In­sti­tute of South­ern Africa, said he could not spec­u­late about what Trea­sury wanted to achieve by re­view­ing the sys­tem.

“We ex­pect they will ap­proach us in the course of the year. We have trust in Trea­sury; they have been very sen­si­ble.

“We be­lieve the state should pro­tect the to­bacco in­dus­try. It in ef­fect has a 52% share in it,” said Van der Merwe.

The World Health Or­gan­i­sa­tion ad­vo­cates a 75% tax bur­den and “it would be log­i­cal” if Trea­sury was look­ing at push­ing the lo­cal 52% bur­den higher, he added.

If that was so, it would sim­ply drive more of the to­bacco mar­ket out of the tax net through il­le­gal cig­a­rette sales, he claimed.

The promised re­view will in­clude e-cig­a­rettes, mean­ing that the nascent in­dus­try may soon find it­self taxed to the hilt as well, erod­ing its com­pet­i­tive­ness against reg­u­lar to­bacco cig­a­rettes.

– De­wald van Rens­burg

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