Illicit tobacco sales will cost SA R7bn this year, says Tisa
Tobacco institute report claims suspended SARS commissioner Tom Moyane turned a blind eye to illicit cigarette industry
The South African Revenue Service (SARS), under the leadership of suspended commissioner Tom Moyane, cost SA R7bn in lost revenue, says a report by the Tobacco Institute of Southern Africa (Tisa).
Tisa represents the legal tobacco products industry in the region. It alleges in a report released at the JSE on Thursday that SARS under Moyane had turned a blind eye to the illicit industry and stopped inspections at tobacco factories.
SA is one of the world’s biggest markets for illicit cigarette sales.
Tisa chairman Francois van der Merwe said that tobacco money had played a role in state capture “so no wonder our relationship with SARS was terminated” in 2014.
The fact that cigarettes were available for as little as R5 a pack of 20 meant taxes were not being paid, he said. The tax on a pack of 20 is about R17.85.
The report states that the illicit tobacco trade will cost SA R7bn this year.
At the launch of the report at the JSE on Thursday, Tisa chairman Van der Merwe said: "At least 8-billion sticks are illicit. SARS is losing over R7bn just this year. This is 14% of the estimated government shortfall of R50bn."
Tisa said its members stimulate economy-wide production amounting to more than R54.3bn and contribute R22.4bn in government tax revenue.
According to the report, cigarette sales at prices below the minimum tax owed to SARS (R17.85 per pack) were found in 100,000 shops. Just over a third — 33.4% — of cigarettes sold in these shops were below the minimum tax owed per pack.
"Brands retailing at prices consistently below the tax owed on a pack of cigarettes are assumed not to have paid the tax due," reads the report.
"If a box of 20 cigarettes is sold for less than R17.85 it is illegal. We have a crime of tax evasion for tobacco in this country," Van der Merwe said.
Taverns and shebeens were excluded from the scope — so the study may have underestimated the size of the illicit tobacco trade.
Market research firm Ipsos said it did not interview the tobacco companies as the research was market-based and looked only at where‚ what kind and for how much different brands were sold. The research excluded cigarettes sold in taverns and shebeens.
Zibusiso Ngulube of Ipsos said researchers travelled the country and visited about 135‚000 spaza shops‚ hawkers and general dealers selling cigarettes.
The Western Cape‚ Gauteng‚ Eastern Cape and North West are the country’s hotspots when it comes to the sale of ultra-cheap cigarettes‚ with some brands selling for as little as R5 a pack.
“We always knew there was a problem‚ but we never thought it would be this big — especially the extent of the involvement of one large player in the illicit trade‚” he said.
Gold Leaf Tobacco Company accounts for 75.1% of these sales, according to the report.
Its RG brand, the second-most popular in the country behind British American Tobacco’s Peter Stuyvesant, is selling at an average of R10.50 a pack, said Van der Merwe.
Raees Saint, Gold Leaf's attorney, said: “Most, if not all of the allegations concerning our client which our client’s competitor has spread are false.”
Tisa and SARS used to work together on an illicit tobacco trade called Project Honey Badger, but under suspended SARS commissioner Tom Moyane, the relationship broke down.
"Tobacco money played a role in state capture so no wonder our relationship was terminated in 2014," Van der Merwe said.
"This created the opportunity for illicit traders to flourish. There were no investigations or audits," he said.
Based on the report, Tisa suggests that SARS place customs officials in all cigarette manufacturing plants, and ban sales below the level of tax owed.
“This will take two to three years to implement and the legal tobacco industry won’t be around in two to three years if this continues,” Van der Merwe said.
BAT, the largest cigarette maker operating in SA and a Tisa member, says it has been cutting jobs as it struggles to deal with the rogue competition.
“The problem is significant in terms of how readily available these illegal cigarettes are,” Ronan Barry, BAT’s head of legal affairs, told Bloomberg.
The company’s manufacturing plant south of Johannesburg was operating below 50% capacity and “almost 400 jobs have been lost at the factory alone since 2014 due to the growth in illicit trade”, he said.
SARS acting commissioner Mark Kingon said earlier this week that SARS would prioritise illicit trade and strengthen the capacity of its investigating units.
The Fair-trade Independent Tobacco Association (Fita), an opposing industry body of which Gold Lead is a member, responded to the report with a strongly worded statement on Thursday.
It accused Tisa of "targeting" its members. It said multinational tobacco companies had lost market share in a shrinking market to local producers, as smokers became more price-conscious.
Customs and excise losses were not the only factor to consider in understanding "fiscal risks to the economy", Fita said, and one should look also at other corporate and personal income taxes, and consider the entire value chain.
It also resurrected allegations that multinationals were involved in illicit activities, including spying on rivals.
Four years ago a Fita member, Carnilinx, accused BAT of corporate espionage.
"Fita is perfectly aware of the problems faced by the tobacco industry as a whole and urges the media to consider all aspects that lead to losses to the economy and to not become the public relations arm of some," Fita said on Thursday.
With Bloomberg and staff writers