Billions of rand in duty lost to government’s revenue coffers

ESTIMATES of the size of the illicit trade in cigarettes, alcohol and illegally imported clothing runs into billions of rand of lost government revenue in excise duties and taxes, while hundreds of thousands of local jobs are also lost, according to research by Business Leadership South Africa (BLSA).

The research, presented at a BLSA event in Johannesburg yesterday, showed that the most prevalent type of illicit tobacco were cigarette packs sold below master contract token price (R20.01 in 2020). Some packs were sold at R10, the research showed.

The size of the illicit cigarette trade was estimated at 30 to 35 percent of the total formal market and 42 percent of the informal market. Cigarettes priced at less that R20 were sold in all provinces ranging from 26.7 percent of the market in Limpopo, to 37.3 percent in the Northern Cape.

The economic impact of illicit tobacco products was estimated to be a R7 to R8 billion loss in excise tax and job losses. It also contributed towards increased spending on health.

By volume, the illicit alcohol market was estimated at 14.5 percent, or by value R12.9bn, of the total market.

By volume, smuggling contributes 28 percent, tax leakage 24.8 percent, counterfeit by 24.3 percent and homebrew products by 22.9 percent of the total illicit alcohol market.

By product type, illicit spirits accounted for 45 percent of the total volume of illicit alcohol products market, homebrew 23 percent, sugar fermented 25 percent, ethanol 5 percent, and beer 0.1 percent.

Illicit alcohol products resulted in an estimated economic loss of R6.4bn in excise tax and job losses, the research showed.

The revenue loss by type were smuggling (38 percent), counterfeit (30.5 percent), tax leakage (31.1 percent), and homebrew products (0.4 percent).

Excessive regulations and restrictions on licit alcoholic beverages, high excise tax, ineffective enforcement and border controls, inadequate sanctions for offenders, and corruption were some of the problems that led to illicit alcohol flooding the local market.

Availability of production inputs, high prices and restrictions on licit alcohol were some of the enablers of illicit alcohol trade in the business environment.

Ethanol was often smuggled from Mozambique and eSwatini, while the smuggling of premium products from Europe took place through the major ports of Durban, Cape Town, Walvis Bay, Beira and Dar es Salaam.

In the clothing and textile trade, the most common form of illicit trade was through the under-declaration of customs value. A study in 2007 showed a 50 percent undervaluation of items from China.

This illicit trade was often enabled through inadequately staffed customs ports of entry, inexperienced and corrupt customs officials, as well as lack of regulatory compliance, rebates abuse, tax and vat fraud, and customs fraud.