SA’s illicit trade, at 24% of all tobacco sold, is double the global average, says the writer. Picture: ISTOCK
SA’s illicit trade, at 24% of all tobacco sold, is double the global average, says the writer. Picture: ISTOCK

Savera Kalideen of the National Council Against Smoking (NCAS) has written that SA’s problem of illicit tobacco could be solved if there is political will. That is undoubtedly true.

She also stated that evidence shows that all manufacturers have a role to play in the illicit trade problem, the implication being that the Tobacco Institute of SA (Tisa) members are also complicit. That is simply untrue and Kalideen was reckless to state it.

Tisa members British American Tobacco, Japan Tobacco International and Philip Morris International declare every cigarette they manufacture or import to the South African Revenue Services (Sars) and pay the excise due, without exception. There is not a shred of evidence to suggest otherwise.

Are we willing to let this go on for another three or more years while the government works out which high-tech solutions to implement?

We have repeatedly asked Sars to place officials in all factories operating in SA to see for itself who is playing fair and honest and who is not. There is clear evidence of this: Tisa commissioned a study with Ipsos, the results of which were published in July, exposing the size of SA’s illicit tobacco trade problem and the brands behind it.

We also launched a campaign — #TakeBackTheTax — to mobilise the public to urge the government to act decisively and urgently. The inconvenient truth is that Tisa, not NCAS, is leading the fight against SA’s illicit tobacco trade which is costing the state at least R7bn in 2018.

Kalideen rightly referenced the critical testimony of Cecil Morden (former chief director: economic tax analysis at the Treasury) at the Sars inquiry in June, which exposed that the Treasury’s receipts from tobacco had declined substantially in recent years, even as excise rates have been increased, largely as a result of a decline in the number of cigarettes declared by manufacturers to Sars.

This is the key to understanding the problem of illicit trade in SA and the reason for it is simple: law-abiding companies — Tisa members — who declare all their production are rapidly losing market share to illicit manufacturers who do not. In short, the tax base is shrinking as market share has shifted to cheap brands such as RG, Savannah and many others selling for R10-R12 a pack, clearly having evaded the tax due, which is a minimum of R17.85 per pack.

Three recent developments have brought the overall picture sharply into focus: first, Gene Ravele, former head of enforcement at Sars, disclosed to the Sars inquiry that the instruction from the top of Sars in 2014 was to stop inspections of cigarette factories.

Second, Cecil Morden testified to the decline in declared cigarette production in SA and the consequent loss of government revenue. Third, the Ipsos study exposed that brands selling below the minimum tax due to Sars of R17.85 are rapidly overtaking legal brands selling at tax paid prices.

There is renewed hope in that both Sars and the South African Police Service have made public commitments to address the problem. The question remains, however, what is to be done? Kalideen suggested the implementation of a track and trace system — a good idea and legislation already empowers Sars to make this a reality.

We don’t need to wait for new legislation, nor should we. But even in a best-case scenario, due to lengthy government procurement processes and lead times to purchase and install new machinery in factories, this will take years to be fully implemented. The question that Kalideen has not asked or answered is the crucial one: what do we do in the meantime?

The Treasury is losing at least R20m a day. Are we willing to let this go on for another three or more years while the government works out which high-tech solutions to implement? Tisa’s recommendation is that we need short-term, as well as long-term, solutions. That is why we are calling for new enforcement measures to be implemented in 2018.

A crucial first step would be an immediate crackdown on illegal cigarette production, by placing Sars officials permanently in factories. The second is a prohibition on the sale of cigarettes below the level of duty owed, that is below R17.85 per pack/90c per cigarette — inserted into this year’s Customs and Excise Act.

If Kalideen has better ideas about what can be done now about the illicit trade in tobacco that is harming the public health agenda, and not just what can be done in the distant future, we would love to hear them.

Lastly, Kalideen rightly states that the illicit trade undermines the objectives of the new tobacco bill. No new legislation will achieve any objectives of reduced consumption as long as more than one-million packs of cheap, unregulated cigarettes are sold in our country every day. The government should fix illicit sales first to prevent the embarrassment of yet another tobacco bill failing.

Francois van der Merwe
Chair of the Tobacco Institute of Southern Africa

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