Illicit ciggies: R7-8bn tax lost

REPORT: IN INFORMAL MARKET, FOUR OF EVERY 10 SOLD BELOW MINIMUM COLLECTIBLE TAX

State capture was financed with illegal tobacco money, says #TakeBackTheTax spokesperson. Moneyweb

The market share of illegal cigarettes sold in South Africa jumped to 33.1% in 2018’s third quarter, according to Ipsos’ latest research report on the illicit tobacco trade.

South Africa is facing a massive onslaught from this trade, said Tobacco Institute of Southern Africa (Tisa) chair Francois van der Merwe.

Van der Merwe said tobacco was the biggest contributor to the fiscus globally and this incentivised traders to evade taxes levied on products.

When former SA Revenue Service (Sars) commissioner Tom Moyane ended the Operation Honey Badger initiative “illegal operators took the gap, and made billions”. If government understands the quantum of the loss to the fiscus, greater urgency may be applied to curtailing the illicit trade.

To measure the illicit market, Ipsos – commissioned by Tisa – settled on a conservative benchmark of the minimum collectible tax (MCT) of R17.85 per pack of 20, or 90 cents per cigarette (excludes costs).

Any selling price below this is considered illegal for the study’s purposes. Ipsos selected a representative sample of retail outlets (excluding mobile hawkers, taverns and shebeens), auditing each one twice, in June and September; 4 124 shops were audited twice.

The study showed that from June to September, illegal cigarette trade escalated alarmingly, with the market share of cigarettes selling at MTC increasing from 33.4% to 41.8%. RG, manufactured by Gold Leaf Tobacco, is now the biggest selling brand in southern Africa.

This makes South Africa the first country in the world to allow an illegal cigarette brand to become the top seller.”

Market share escalates:

Brands retailing below MCT in September make up 33.1% (June: 26.8%) of South Africa’s sales – up 24% over three months.

In the informal market, four out of every 10 sticks sold are below MCT. The market share of sales below MCT has increased from 33.4% to 41.8%.

While MCT sales have arisen across South Africa, in Western Cape and North West informal markets, these illicit trades have overtaken legal sales. Below-MCT brands sell for R5 to R10 a pack.

Gold Leaf Tobacco Company brands make up 73% of all sales below MCT – with 89% of its RG cigarettes sold below MCT.

#TakeBackTheTax spokesperson Yusuf Abramjee said state capture was financed with illegal tobacco money. Sars’s failure to act against tax-dodging manufacturers resulted in lost tax revenue increasing from R7 billion to R8 billion, he added.

Lesotho crackdown

Abramjee referred to the Lesotho Revenue Authority (LRA), which is fighting back against the illicit trade.

On November 16, the LRA made its biggest bust in five years, confiscating 380 000 sticks of RG cigarettes worth over R1 million being smuggled into Lesotho.

The LRA considers RG to be an illicit cigarette as it’s usually sold below the M20 (R1 equals M1.0045) threshold for a packet of cigarettes.

While retailers could be encouraged not to stock illegal cigarettes (Spar has stopped selling underpriced cigarettes), 80% are sold in the informal economy and Tisa doesn’t want to criminalise small business.

Abramjee said: “If Sars does not act very soon, the legal cigarette market could die.”

If Sars does not act soon, legal market may die