Illegal cigarettes in SA sell for less than the tax payable on a single pack
For every R1 profit that Tisa members lose to illegal cigarettes, the government loses R5 across all taxes
Over the past three years, we have seen a rapid and significant growth in the availability of cigarette brands selling below the tax owed to Sars. Tax alone on a packet of 20 is R17.85, yet cigarettes are sold all over the country for as little as R5 a pack. It doesn’t take a rocket scientist to see that the companies selling cigarettes for less than the minimum collectable tax of R17.85 are evading taxes.
This growth in illegal cigarette trade has naturally impacted the legal trade. Tobacco companies that comply with the law and pay their taxes have seen sales decrease by more than 20%, and more than 1,000 direct jobs have been lost.
In 2018, the Tobacco Institute of Southern Africa (Tisa), whose members are legal companies that declare all of their sales to Sars and pay their taxes, commissioned Ipsos to conduct research into the prevalence of cigarettes selling below the minimum tax owed of R17.85 a pack.
In July, Ipsos published its report on the findings. In summary, cigarettes selling below R17.85 are available in three out of every four shops in the informal retail sector, and in more than 100,000 shops in the country; brands owned by one local company account for 75% of all illegal cigarettes nationally; and a brand called RG, which retails on average for about R10 a pack, is now the second largest brand in the market overall.
The research accumulated extensive data on the tobacco market. All of the underlying data that supported the report and its findings will be made available to the relevant authorities, including Sars, if it wants it. Tisa has been asked why it does not share all the underlying data with the media. The reason is simple: we will be conducting research at regular intervals.
We must protect the integrity of the methodology and the outlets tracked so that we can correctly measure trends in the market for illegal cigarettes. Any research house will agree that should the base data be shared with the wrong people, it could be used to disrupt the research.
We know of no other country where a pack of 20 cigarettes can be easily found and bought for R5. Undoubtedly this is driving smoking within SA’s youth
Rampant tax evasion
It is now widely agreed that illegal cigarettes that evade tax are rampant in SA. The Treasury testified to the Sars Inquiry that in the last year alone its tobacco excise receipts are down by 20%. The Treasury attributed this to accelerating growth in the illicit tobacco trade. In July, a former Sars executive, Gene Ravele, testified at the inquiry. He said that while he was in charge of customs and tax enforcement, in 2015, there was an order from the top to stop inspecting cigarette factories. He said that when the Treasury complains about losing tobacco tax revenue, "it was planned" by the former Sars administration under Tom Moyane.
In July, Tisa launched the #TakeBackTheTax campaign, which includes advertisements in both traditional and social media. The aim of the campaign is to raise public awareness of the problem and its cost to society, and to motivate government action. So far, almost 10,000 South Africans have signed up to support our campaign and more than 1,000 citizens are signing up every week.
Sars, now under commissioner Mark Kingon, has committed to clamping down on tax-evaders in the tobacco sector and stamping out illegal cigarettes. In August, Tisa and Fair-Trade Independent Tobacco Association (Fita) — another South African tobacco association — were requested by Sars to sign up to a commitment to support Sars’ efforts to tackle illicit trade. Both organisations did so — which is why it is disappointing that Fita has attacked the #TakeBackTheTax campaign instead of supporting it.
If Fita is really serious about tackling the illicit tobacco trade — as it has promised Sars— it could, instead, consider supporting the Tisa campaign.
Some commentators, led by Fita, have criticised our campaign as motivated by a desire to protect Tisa members’ profits. Obviously, the illegal cigarette industry has hurt Tisa members, which account for more than 90% of the tax paid to Sars from tobacco. Yet, according to our internal estimates, Tisa members are less than 50% of the market overall.
But the cost to society is much larger: for every R1 profit that Tisa members lose to illegal cigarettes, the government loses R5 across all taxes, including excise, VAT and income tax. We know of no other country where a pack of 20 cigarettes can be easily found and bought for R5. Undoubtedly, this is driving smoking within SA’s youth.
As said, people are losing their jobs. To the more-than 1,000 direct jobs lost by Tisa members in the past three years, there is a knock-on effect on indirect jobs and dependents. More jobs are at risk in the legal tobacco value chain today.
If Fita’s members really are victims of the illicit tobacco trade, as they claim, and not its perpetrators, maybe it’s time for them to get on board and commit to ensuring that every cigarette sold in SA is legal and that all taxes are paid.
• Van der Merwe is CEO of the Tobacco Institute of Southern Africa