Lockdown ban on tobacco sales exposes gaping holes in state capacity
By September Sars had handed over to police just three cases involving cigarette and alcohol smuggling
All too many of the issues raised by SA’s Covid tobacco sales ban reflect poorly on the government’s ability to deal with illegality, smuggling and crime. But the five-month ban tells us other things about state capacity too. Negative signals have been sent on tax compliance, revenue collection, border security, policy formulation (or lack of it) and, perhaps unsurprisingly, the minimal consequences for criminality.
By September the SA Revenue Service (Sars) had handed over just three cases involving cigarette and alcohol smuggling to the police for further investigation, despite having intercepted goods valued at more than R100m during the bans.
Sars is being slowly rebuilt after having had its capacity shattered during the state capture era. But this will take time, and SA is unlikely to see a rapid revival of the specialised units which, before lockdown, were making inroads into the illegal tobacco industry.
It is damage of this sort — the hollowing out of institutions — that will make the struggle against illicit trade so difficult and protracted. Sars commissioner Edward Kieswetter argues that “criminals have embedded themselves and it will take years to undo that”. Pick n Pay chair Gareth Ackerman agrees that it will take “years” to undo the consumer shift towards buying illegal cigarettes. Far from beefing up enforcement, the trend is in the opposite direction, with finance minister Tito Mboweni actually cutting allocations to the police service by R1.2bn in the October medium-term budget.
The share of the market owned by formal tax-compliant cigarette manufacturers has no doubt made a hefty bounce-back (from zero) now that the main formal channels — supermarkets and garage forecourts — have reopened. But how much market share the legal and compliant industry has regained is yet unknown. Illicit cigarettes were already a huge problem before the ban, possibly making up as much as 35% of the market.
The tax loss to the SA fiscus during the ban has been estimated at R4.8bn.
Beyond tax issues, further problems arise in the institutions responsible for policing, border controls and combating smuggling. Industry experts insist many of the illicit cigarettes sold during the ban were manufactured locally and never left the country, though they were declared to be “exports” for tax purposes.
These techniques — ghost exports, undeclared production and round-tripping — are only possible where the authorities are ineffective, corrupt or both. The evidence is that the volume of cigarettes declared for export (in SA) is far lower than the number registered by the tax authorities in the recipient country (Botswana, Namibia and Lesotho especially during the ban). Effective compliance requires the operational collaboration of different national tax authorities, a perpetual problem in the Southern African Development Community.
Such collaboration became more difficult with the signing into law of the Border Management Authority Act in July. The law centralises all border management functions (fiscal, security, health, environmental, trade and transport) in a new agency, with the country’s notoriously inefficient department of home affairs designated “lead department”.
In June the auditor-general shared a report that found “a notable regression” in the department’s management of illegal immigrants. It concluded that it would take 68 years to finalise the asylum case backlog, even with no new cases. Lobbyists fought to have the much more effective National Treasury designated lead department, to no avail.
It is not as if border security had been effective in the recent past. It is not clear at this point what proportion of the illicit market is simply smuggled across SA’s borders, but expert opinion is that illicit trade is rampant. An October report on the tobacco ban by the Global Initiative Against Transnational Organised Crime comments that there is “a lack of political will to stop the movement of goods and people illegally and poor enforcement of regulations”.
The Global Initiative report concludes that “with weak state capacity following years of state capture and the boom in the illicit market during the Covid-19 pandemic, the black market trade in tobacco is likely to become even more of an intractable problem”. With home affairs now leading the charge, improvement is unlikely.
Anti-tobacco activists in SA, with the support of trade union federation Cosatu, have suggested that the time is ripe for a huge hike in excise taxes on tobacco products. They claim this will raise revenue and achieve the social good of discouraging smoking. But even doubling taxes will produce a relatively trivial sum in the greater scheme of things: another R11bn against a net revenue shortfall of R761bn for 2020/2021. As for discouraging smoking, the track record during the ban — 90% of smokers sourced cigarettes despite the ban — illustrates the insensitivity of tobacco products to increases in price.
Most of all, the anti-tobacco lobby ignores SA’s dual legal-illegal tobacco market problem. Russia faces a similar problem. It is considering raising the excise tax on cigarettes by 20% next year in an attempt to plug holes in its budget. The move, estimated to bring in 340-billion roubles a year, comes as Russia faces a prolonged budget deficit amid weak oil prices and after Moscow stepped up its support for Belarus, which includes a $1.5bn loan.
Yet as in SA, illicit cigarettes are a significant problem in Russia. According to the latest available research, covering the third quarter of 2019, the share of illegal products in the Russian tobacco market reached its highest level yet at 15.6%. In 2020 analysts are estimating that illicit cigarette sales will cost the government 100-billion roubles in lost tax revenues. As in SA, any increase in excise tax will surely worsen this figure, eat into any tax money raised and leave consumers paying the price in higher taxes and more expensive cigarettes at the shop counter.
• Christianson, a freelance writer, has been a political scientist, NGO researcher and development banker. He entered business journalism in 1997 and was Diageo African Business Writer of the Year in 2006.
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