Illicit tobacco continues to leverage high taxes

THE South African fiscus loses around R8 billion per year in revenue due to the deluge of illegal cigarettes consumed in the country and most of these are produced by local manufacturers who fly under the taxman’s radar.

Francois Van der Merwe, the CEO of the Tobacco Institute of Southern Africa (Tisa), said research had shown that the illicit market produced more than 9 billion cigarettes per year, which equates to more than 1.2 million packs of 20 per day.

He said that according to the Ipsos Tobacco Market Study released by Tisa last week the government will lose R8bn this year due to the non payment of duties on illicit cigarettes.

“Since 2010 to 2017, government lost, on average, more than R4bn per year in unpaid duties on cigarettes alone, which means from 2010 to date, the SA government has lost an estimated R40bn due to the illicit trade in cigarettes,” he said.

“All illicit cigarettes are available in the market for well below the minimum collectable tax of R17.85, which severely compromises the government’s health agenda due to the market being flooded with cheap, non-duty paid cigarettes, some selling for between R5 and R7 a pack or 50 cents for a single cigarette.

“The biggest brand in the market, sells below the taxes due at an average price of R10 per pack. Government’s health agenda is further compromised where products do not comply with certain regulatory requirements, for example, the products exceeding the maximum tar and nicotine levels and non-compliance with regulations.”

The illicit industry now has a 42% share of the informal market, according to the study.

Van der Merwe said cigarettes were one of the most trafficked illegal goods, but most are now produced in the country.

Historically, illicit cigarettes were smuggled over land and sea from Dubai, China, Botswana, Swaziland, Lesotho and Zimbabwe.

“Currently, more than 90% of illicit cigarettes sold in SA are manufactured locally. While sporadic entry of the product from foreign countries still occurs, the vast majority of illicit cigarettes today are produced by manufacturers registered with Sars within the borders of South Africa.

“The change in modus operandi from smuggling to non-duty paid local manufacturing is mainly due to major customs modernisation efforts by Sars at border posts prior to the Tom Moyane era.”

Van der Merwe said the illicit trade had a negative impact on legal manufacturers and farmers as it reduced demand for local tobacco leaf.

The order for cigarette tobacco was cut by 10% for 2018 and by a further 5% for 2019, threatening the livelihoods of farmers and 8 000 to 10 000 farm workers.

Van der Merwe said it was up to Sars to clamp down on the illicit trade and it should focus on auditing manufacturers and raiding large wholesalers rather than targeting spaza shops.

“We are encouraged that Sars is considering some interventions in the new year, for example placing counters on every cigarette manufacturing machine in South Africa where the information on numbers of cigarettes being manufactured will go directly to Sars when machines are operational.

“We have also made proposals to Sars that it should audit all cigarette manufacturing plants to monitor inputs, for example cigarette paper, filter tow, packaging material and tobacco versus outputs of total cigarettes produced and declared.”

Van der Merwe said Tisa had also proposed that cigarette sales below the minimum collectable tax be banned.

The Cancer Association of South Africa’s national advocacy co-ordinator Lorraine Govender said the association was “deeply concerned” that the illicit trade was contributing to the spread of the tobacco epidemic.

“Illicit trade increases the accessibility and affordability of tobacco products, thus fuelling the tobacco epidemic and undermining tobacco control policies. Illicitly traded tobacco products are outside the regulatory framework for strict health warnings, maximum tar/nicotine levels and sales prohibition to minors.

“Illicit cigarette sales focus on minors who cannot buy products legally and on those on low incomes and this often results in addiction from an early age. Illicit distributors also often supply other illicit products such as alcohol, drugs and firearms.”

Govender said 42 100 South Africans died from tobacco-caused disease every year, but this did not deter more than 55 000 children aged between 10 and 14 and 6 321 000 adults aged 15 and up from smoking.

Peter Ucko, the CEO of Tobacco Alcohol and Gambling Advisory Advocacy and Action Group, said regardless of whether cigarettes were legal or illicit, smoking was an addictive and dangerous habit that caused health problems such as high blood pressure and cancer.