Sars still not up to scratch in dealing with illicit tobacco trade

The capability of Sars to deal with the illicit trade in cigarettes and tobacco is improving but is not where it should be, officials of the tax authority told MPs on Tuesday.

The state loses billions in tax revenue each year due to the illicit trade in cigarettes and tobacco products. The ability of Sars to collect the tax payable was, along with its other capabilities, gutted under the reign of former commissioner Tom Moyane.

Sars acting chief officer for digital information services and technology Intikhab Shaik told the finance committee that Sars has lost certain skills and is now in the rebuilding phase. The tax authority has to “up its game”, he said.

“There certainly is a capability at Sars but I would not be telling the truth if I were to say that we have full capacity. We definitely need to rebuild. We have lost certain skills and certain units were restructured,” Shaik said. He is encouraged by imports of cigarettes decreasing while exports are increasing.

“So, in our minds we have certainly not turned the corner but we are seeing that we are on the right path to recovery when we look at the figures.”

National Treasury chief director of economic tax analysis Chris Axelson also believed that there has been progress, noting that three years ago there was a 7% drop in excise duties on domestically produced tobacco, rising to a 9% drop two years ago.

“There was a huge drop off in revenues,” he said, even though the Treasury had hiked the rate of excise duty. However, in 2018 there was a bit of a rebound with these revenues increasing by 9%, though, admittedly, off a low base and so far in 2019 there has also been an increase.

Axelson said that the Treasury is concerned about improving Sars’ capability, which is why finance minister Tito Mboweni allocated an extra R1bn to the tax authority over the next three years in the medium-term budget policy statement (MTBPS).  

However, Tobacco Institute of Southern Africa (Tisa) chair Francois van der Merwe does not believe Sars is even scratching the surface in addressing the illicit trade in cigarettes. He stressed in an interview that the big problem is not the import of illegal cigarettes but the failure of registered local manufacturers to pay excise duty of R16.66 per packet upfront to Sars on their production. VAT has to be added on to this.

This failure enables the manufacturers to sell cigarettes at very low prices. Tisa estimated that more than 40% of the total cigarette market is illegal in that no excise duty is paid and that the fiscus is losing more than R10bn annually due to this failure. “The profit margins on illegal cigarettes are massive,” Van der Merwe said.

Sars executive for customs and excise Kumaran Moodley noted that imported cigarettes in the period April 19 to September 19 2019 had a customs value of R810.5m compared to the R766m during a similar period the previous year. The customs value of exports was R1bn and R840m, respectively.

Said Moodley, “Sars is now conducting periodic visits to tobacco and cigarette manufacturers and there is a deployment of customs inspectors to a number of cigarette manufacturing facilities. The officer’s role is to conduct periodic checks on the production, consolidation of tobacco use, the number of cigarettes produced, and the quantities removed for distribution.” 

ensorl@businesslive.co.za