Illicit tobacco sales deprive the fiscus of over 19 billion rupees a year

British American Tobacco South Africa (Batsa) says research indicates that criminals have flooded the South African retail market with illicit tobacco, citing a major new study by independent market researcher Ipsos.

The government lifted the ban on the sale of tobacco products in August 2020, but according to Batsa this “did little to curb the rampant growth of illegal trade.”

The tobacco ban was imposed by the Minister of Cooperative Government and Traditional Affairs (Cogta) on May 28, 2020, under regulation 45 of the Covid-19 national disaster.

The government has been warned that a ban on tobacco from Covid-19 would result in an increase in the illicit tobacco trade.

In May 2020, Batsa urgently asked for clarity on the decision-making process that led to the tobacco ban. Batsa’s court action against Minister Cogta was delayed and was only heard after the tobacco ban was lifted in August 2020.

the judgement was issued in December 2020 and the tobacco ban was found to be unconstitutional.

Furthermore, Cogta was unable to prove that the tobacco ban had a positive impact on health.

Commenting on the sentence, Batsa warned of the “explosion in the illicit trade that occurred during the ban on tobacco and steam products”.

The Humanities Research Council published research showing that illegal cigarettes had been widely available during the level 5 block.

Ipsos studies

Ipsos, a world leader in market research, has conducted two studies on the illegal tobacco trade in South Africa since the tobacco ban was lifted in 2020.

The first was conducted “soon after criminal manufacturers took control of the cigarette market in South Africa following the government’s ban on legal tobacco sales” and the second was conducted between March 2 and 21. 2022 in 4,593 retail outlets nationwide.

The latest study, which incorporated “mystery shoppers” tasked with buying the cheapest cigarettes available at a retail outlet, indicates an explosion in illicit cigarette sales:

  • Four out of five stores in the Western Cape (80%) sell cigarettes below the minimum tax rate (MCT) of R22.79 per pack, as do nearly 70% of outlets in Gauteng. This is a significant increase over previous research. “Packets of cigarettes that sell for less than MCT should be considered illegal, as this means that the manufacturer has not paid the minimum amount of duties to Sars. [South African Revenue Service]. “
  • The number of garage yards across the country selling illicit cigarettes has quadrupled in the past year.
  • You can buy a single pack of 20 cigarettes for as little as R7 at many retail outlets nationwide. This is even cheaper than the lowest price of R8 found in the October 2021 study.
  • “Products bearing trademarks licensed or owned by Zimbabwe-based Gold Leaf Tobacco Corporation (GLTC) and Carnilinx, a member of FITA (FITA) of South Africa, continue to win this illegal price war.”
  • Most stores in Western Cape (79%), Free State (74%) and Gauteng (69%) were selling cigarettes below the MCT, showing that “manufacturers could not have paid the taxes due on these products” . This is a significant increase over the previous Ipsos study.
  • The brands “owned or licensed by GLTC Zimbabwe are the most widely available at illegal prices, with nearly half (44%) of purchases made under MCT. The under MCT purchases of proprietary brands or licensed to GLTC South Africa have increased by 17% in the last year ”.
  • “More than half (52%) of Carnilinx’s proprietary brand purchases were less than MCT.”
  • The study found no Pall Mall cigarettes sold below MCT, even though it was the cheapest brand available in 642 stores (about 14% of all sampled stores). Pall Mall is owned by Batsa.

Batsa GM Johnny Moloto commented that: “The latest Ipsos study provides compelling evidence that criminals continue to dominate the tobacco trade in South Africa … These criminals are hiding in plain sight, robbing the fiscus of vital revenue when it is more necessary. They are destroying legitimate businesses and jobs as national unemployment rates hit record highs. “

Moloto added that illicit tobacco sales “should be addressed with the utmost urgency … They are depriving the fiscus of over 19 billion rupees a year”.

Is SARS doing enough to eradicate the illicit tobacco trade?

Since Edward Kieswetter was appointed commissioner of SARS, there has been an increase in successful interventions against the illicit tobacco trade.

In February, searches and seizures of companies and cigarette manufacturers were carried out in KwaZulu-Natal, the Western Cape and Gauteng. Master cases worth R51 million seized. A main crate contains 50 cartons or 10,000 cigarettes.

In March, 2.31 million cigarette and narcotic sticks were seized from residences belonging to a well-known cigarette vendor in Phoenix, Durban.

Kieswetter said Sars is “building its ability to make it difficult and expensive for those traders who choose not to comply”.

However, SARS canceled the track and trace tender in 2020 and there are no indications that it intends to change the current system currently in place to control the illicit tobacco trade.

Moneyweb asked Moloto for his views on how to eradicate the illicit tobacco trade.

He replied that the illicit trade in SA is “multifaceted” and that Batsa “asks SARS to take several steps to eliminate it”, listing these steps as follows:

  • All manufacturers must comply with Sars production counter rules.
  • SA should immediately introduce a minimum retail price of R28 for a pack of 20 cigarettes.
  • South Africa must implement stricter controls on all producers and borders and SARS should immediately implement its CCTV regulation.
  • The country must ratify the WHO [World Health Organisation] Illegal trade protocol to combat illicit trade.
  • South Africa should adopt a comprehensive tracking and tracing system aligned with the WHO Illicit Trade Protocol across the tobacco industry.

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