Illicit tobacco sales deprive the fiscus of more than R19bn a year

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British American Tobacco South Africa (Batsa) says research indicates criminals have flooded South Africa’s retail market with illicit tobacco, citing a major new study conducted by independent market researcher Ipsos. 

The government lifted the ban on the sale of tobacco products in August 2020, but according to Batsa this “has done little to curb the illegal trade’s rampant growth”.

The tobacco ban was imposed by the Minister of Co-operative Governance and Traditional Affairs (Cogta) on May 28, 2020, under Regulation 45 of the Covid-19 national state of disaster.

The government was warned that the Covid-19 tobacco ban would result in an increase in the illicit tobacco trade.

In May 2020 Batsa requested urgent clarity on the decision-making process that led to the tobacco ban. Batsa’s court action against the Cogta minister was delayed, and was only heard after the tobacco ban had been rescinded in August 2020.

The judgment was handed down in December 2020, and the tobacco ban was held to be unconstitutional.

Cogta was also not able to prove that the tobacco ban had any positive impact on health.

In commenting on the judgment, Batsa warned of the “explosion in illicit trade that occurred during the ban on tobacco and vapour products”.

The Human Sciences Research Council published research showing that illicit cigarettes had been widely available during the Level 5 lockdown.

Ipsos studies

Ipsos, a global leader in market research, has conducted two studies into the illegal tobacco trade in South Africa since the tobacco ban was lifted in 2020.

The first was conducted “soon after criminal manufacturers seized control of South Africa’s cigarette market as a result of the government’s lockdown ban on legal tobacco sales”, and the second was conducted between March 2 and 21, 2022, across 4 593 nationwide retail outlets.

The latest study, which incorporated “mystery shoppers” who were tasked with purchasing the cheapest cigarettes available at an outlet, indicates an explosion in sales of illicit cigarettes:

  • Four out of five stores in the Western Cape (80%) sell cigarettes below the minimum collectible tax (MCT) rate of R22.79 per pack, as do almost 70% of outlets in Gauteng. This is a significant increase compared with previous research. “Cigarette packs that sell for less than the MCT should be considered illegal, as this means the manufacturer has not paid the minimum amount of duties to Sars [South African Revenue Service].”
  • The number of garage forecourts across the country selling illicit cigarettes has quadrupled in the last year.
  • It is possible to buy a single pack of 20 cigarettes for as little as R7 in many retail outlets nationwide. This is even cheaper than the lowest price of R8 found in the October 2021 study.
  • “Products bearing trademarks licensed to or owned by Zimbabwe-based Gold Leaf Tobacco Corporation (GLTC) and Carnilinx, a member of South Africa’s Fair-Trade Independent Tobacco Association (FITA), continue to win this illegal price war.”
  • The majority of stores in the Western Cape (79%), the Free State (74%) and Gauteng (69%) sold cigarettes below the MCT, demonstrating that “the manufacturers could not have paid due taxes on these products”. This is a significant increase since the previous Ipsos study.
  • Brands “owned by or licensed to GLTC Zimbabwe are the most widely available at illegal prices, with almost half (44%) of purchases made below MCT. Purchases below MCT of brands owned by or licensed to GLTC South Africa rose by 17% in the last year”.
  • “More than half (52%) of purchases of brands owned by Carnilinx were below MCT.”
  • The study did not find any Pall Mall cigarettes sold below the MCT, even though it was the cheapest available brand in 642 stores (around 14% of total stores included in the sample). Pall Mall is owned by Batsa.

Batsa GM Johnny Moloto commented that: “The latest Ipsos study provides compelling evidence that criminals continue to dominate South Africa’s tobacco trade … These criminals are hiding in plain sight, robbing the fiscus of vital revenue when it is needed most. They are destroying legitimate businesses and jobs while national unemployment rates hit record highs.”

Moloto added that illicit tobacco sales “should be tackled as a matter of utmost urgency … They are depriving the fiscus of more than R19 billion a year”.

Is Sars doing enough to eradicate the illicit tobacco trade?

Since Edward Kieswetter was appointed commissioner of Sars, there has been an increase in successful interventions against the illicit tobacco trade.

In February, search and seizure operations were carried out on cigarette companies and manufacturers in KwaZulu-Natal, the Western Cape and Gauteng. Master cases to the value of R51 million were seized. A master case holds 50 cartons or 10 000 cigarettes.

In March, 2.31 million sticks of cigarettes and narcotics were confiscated at residences belonging to a well-known cigarette supplier in Phoenix, Durban.

Kieswetter said Sars is “building its capability to make it hard and costly for those traders who choose to be non-compliant”.

However, Sars cancelled the track and trace system tender in 2020 and there are no indications that it intends to change the current system that is currently in place to control the illicit tobacco trade.

Moneyweb asked Moloto for his views on how the illicit tobacco trade can be eradicated.

He replied that the illicit trade in SA is “multi-faceted” and that Batsa is “calling for Sars to take several steps to stamp this out”, listing these steps as follows:

  • All manufacturers must be compliant with Sars’s production counter rules.
  • SA should immediately introduce a minimum retail sales price of R28 for a pack of 20 cigarettes.
  • South Africa needs to implement stricter controls on all manufacturers and borders, and Sars should immediately implement its CCTV camera regulation.
  • The country must ratify the WHO [World Health Organisation] Illicit Trade Protocol to fight illicit trade.
  • South Africa should adopt a comprehensive track-and-trace system aligned to the WHO Illicit Trade Protocol, across the tobacco industry.

NOW READ: Sars seizes cigarettes and drugs worth millions in Phoenix

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