JTI welcomes 'reasonable' tobacco excise tax increase

Japan Tobacco International (JTI) has welcomed the tobacco excise tax increase of 4.9% announced during the recent budget speech, while reiterating its calls for the government to snub out the country's illicit tobacco trade.

The company says it supports the need for stable and predictable tobacco excise tax increases provided they are reasonable, as any exorbitant increase places enormous pressure on the tobacco industry, which is a major contributor to SA's economy.

“The recent tobacco excise announcement clearly demonstrates the National Treasury is conscious of the market dynamics," says Ahmad Ismail, JTI's general manager for Southern Africa and Nigeria.

"A much higher tax incidence on tobacco only fuels illegal tobacco trade and negatively affects the legal tax paying players in the industry who comply with the laws of the country."

SA experienced an unprecedented increase in the illegal tobacco trade during the 2020 Covid-19 lockdown, when criminals took advantage of the five-month ban on the legal sale and distribution of cigarettes to "cement their distribution networks", says Ismail.

JTI tested the constitutionality of this ban in court. In 2020, the Western Cape High Court ruled that regulation 45 of the Disaster Management Act, which pertained to cigarette prohibition, “cannot and does not withstand constitutional scrutiny”. The matter was taken under appeal to the Supreme Court of Appeal, which ruled against the government in 2022.

However, since the lockdown bans, the illegal market has continued to thrive at the expense of law-abiding players. According to market research group Ipsos, illegal trade accounted for more than 55% of the total market in 2022 — a figure that JTI maintains is conservative at best.

Meanwhile, Ipsos reports the SA's legal tobacco industry contracted by a further 9.5% last year. This loss of revenue not only threatens the viability of these businesses, but has a knock-on effect with "government revenue falling by the wayside".

The loss of government revenue in the form of the excise tax and VAT payable to the SA Revenue Service (Sars) on tobacco products is now estimated to be between R9bn and R10bn annually.

"In 2022, we noted illicit cigarettes being sold commonly across the country for prices lower than the minimum collectable tax (excise and VAT) of R22,79 per pack," says Ismail.

"In fact, research has shown that there are illicit brands in the market being sold for as low as at R3,50 per pack of 20. It is inexplicable how this has been allowed to continue under the watchful eye of the government. Surely at R3,50 per pack of cigarettes, full due taxes are not being paid.” 

The bottom line is that while the recently announced tax increase gives the legal tobacco industry the opportunity to stabilise its decline, it's critical that government continues to combat illicit trade — something JTI cautions could be fuelled by the Tobacco Products and Electronic Delivery Systems Control Bill, which the health department is preparing to introduce to parliament.

At face value, this bill seeks to tighten SA’s antismoking legislation and regulate e-cigarettes, but Ismail says "it is not a well thought-out document and does not meet our common objectives of preventing underage smoking". 

If certain sections of this bill are not completely revised, he says, "it will have the unintended consequences of establishing SA as a completely black market".

SA government must act

To fight illegal trade and protect the legal tobacco market, JTI calls on the government to take urgent pertinent actions:

• Ratification of the Protocol to Eliminate Illicit Trade in Tobacco Products under the WHO Framework Convention on Tobacco Control (FCTC) in parliament.
  
  
• Law enforcement in the retail environment, including policy development on establishing a legal, economically viable minimum selling price through the Customs Act. This will enable law enforcement to ensure compliance in the market.
  
  
• Prosecution and operations around the border on smuggled tobacco products. Noncompliant products are being openly sold in the market.
  
  
• Sars needs to reinstitute the establishment of a digital tax stamp. "Our security markings on our current packs are by no means a security feature and illegal players continue to underdeclare their volume production," says Ismail. "This process needs to be established in a transparent manner, with an open tender to establish the correct system from a reputable service provider, at a minimal cost to the original equipment manufacturer and the stamps themselves coming at minimum to zero cost or a cost balance between excise and the stamps."   

"The preservation of the legal tobacco market will enable law-abiding businesses in the industry to contribute at their full potential — creating and protecting jobs, encouraging the growth of SMMEs, and increasing their investment in SA," he says.  

This article was sponsored by JTI.