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Consumer criminalisation could encourage a culture of tax avoidance

Government seems oblivious to the dangers of letting the genie out of the bottle with its continued sales ban on tobacco products.
The reality of illegal tobacco sales is probably much worse than the open letter to the president and cabinet ministers suggests. Image: Shutterstock

The headline of an open letter addressed to President Cyril Ramaphosa and cabinet ministers, published over the weekend in Sunday papers, says that in 100 days, 11 million “law-abiding South Africans” have been turned into criminals.

It continues: “Today marks 100 days since you first banned the sale of tobacco and vaping products. SA has been bleeding ever since while criminals in the illegal trade have reaped the rewards.”

A bit further, the letter penned by industry stakeholders and retailers mentions that the “national purse has been denied R3.5 billion in excise duties already” at a time when every last cent is desperately needed.

Whether you burn through a pack a day or hate smoking, anybody would agree that R3.5 billion in lost taxes is a fortune the state can ill afford to lose.

The letter, published over two pages in Sunday newspapers, puts the lost revenue into perspective. It says the R3.5 billion could have funded two new hospitals and 5 000 ventilators. Or paid the salaries of 25 000 nurses, 5 000 doctors and 20 000 primary school teachers. Or bought 23 million food parcels, roughly enough to sustain all the poor in SA for a week. Or it could have been used to build 54 new schools.

SA’s problems in perspective

Whether somebody who has been smoking for 20 years is more likely to die from Covid-19 if they smoke another packet tomorrow seems unimportant when considering the immediate problems suddenly facing millions of people in SA.

Most of the articles in the Sunday newspapers lamented the dire shortage of hospital beds and the suffering of the poor due to the economic effects of the coronavirus pandemic. One of the most shocking statistics is the fact that hundreds of schools in SA don’t have running water for pupils to wash their hands, and that government is seemingly incapable of implementing a simple low-tech solution such as installing water tanks under a roof gutter.

The open letter was signed and the advertisement paid for by stakeholders in the tobacco industry, including British American Tobacco, the SA Tobacco Transformation Alliance, Limpopo Tobacco Processors and the Black Tobacco Farmers Association, supported by retailers such as Spar, Fresh Stop, JJ Cale Tobacconists and the SA Informal Traders Alliance.

Legal action

The advertisements came after the government denied the tobacco industry the opportunity to address their grievances in court by requesting more time to study court documents, a standard request in cases that the courts hardly ever deny.

A recent Moneyweb article indicates that government, having been through British American Tobacco’s replying affidavit, needs the extra time now that it knows what it’s up against – and just how much evidence it will need to present to back up its decision to implement the ban.

Sunday’s letter delivers hard punches. From the “you” in the opening sentence that Sunday marked “100 days since you first banned the sale of tobacco” to the allegation that: “With the stroke of a pen, 11 million previously law-abiding smokers and vapers have been tuned into criminals.”

“Petty criminals who must [now] deal with hardened criminals every day,” say the authors.

“Money that is meant to help build a better nation for all has instead filled the pockets of these billionaire criminals in the illegal trade. Their corrupt enterprises have thrived beyond their wildest dreams while honest, hard-working citizens have had their hopes crushed,” reads the letter.

Read: Tobacco wars turn deadly

The tobacco industry says the tobacco fields of Limpopo, the spaza shops in townships, factory workers, truck drivers and store staff feel the “pain” and are being denied the ability to put bread on the table, shoes on the feet of their children, schoolbooks in their bags and a safe roof over their heads.

“We humbly request that you put an end to this painful prohibition,” the letter pleads right at the end.

It might be too late …

British American Tobacco and its friends might be wasting their time as well as their money in paying for very expensive full-page advertisements.

Indications are that the illegal tobacco industry has used the virus pandemic and lockdown to expand and firmly establish an efficient distribution network.

The clue to this is that cigarettes are now freely available and prices have fallen dramatically during the last few weeks, indicating that there is an adequate supply.

The prices of cheaper brands have decreased from between R100 and R150 per packet to around R50 per packet.

Asking 10 or so smokers where they get their cigarettes can hardly be classified as robust research, but the results are nevertheless illuminating. Cigarettes, most agree, are readily available from smaller independent shops.

Corner shops in suburbs, spaza shops in townships and individuals on street corners are selling cigarettes without bothering to hide their trade much.

Savannah, manufactured by Gold Leaf Tobacco, has seemingly grown into a firm favourite in the absence of those brands that were traditionally considered decent cigarettes such as Peter Stuyvesant and Camel.

Gold Leaf Tobacco has for years been accused of selling cigarettes without paying the full excise and custom duties, with primarily British American Tobacco alleging that some Gold Leaf Tobacco brands are illicit cigarettes, due to the fact that several of them are selling at prices less than the tax payable on a packet of 20 cigarettes. Gold Leaf always denies these allegations.

Read: We pay our taxes, says cigarette maker

If anything, the ban on selling tobacco during the more than three months of lockdown should show authorities which brands are leaking out of which cigarette factories.

Sin taxes are heavy to begin with

But it might be too late to stop the illegal trade. With sin taxes on cigarettes north of R12 per packet, the motivation to bypass tax is huge.

Cigarette smugglers have been running circles around authorities for years, including the South African Revenue Service (Sars), the police and whatever health departments oppose smoking. The strengthening of illicit distribution networks during the tobacco ban will make this even more difficult.

The R3.5 billion in excise duties referred to in the open letter is lost forever and losses will continue in future, while the government will look at tobacco companies’ published production figures and congratulate itself on its success in curbing cigarette sales.

In addition, the actual losses to the fiscus far exceed the R3.5 billion in excise duties. It goes without saying that those in the illegal supply chain – from the manufacturers and smugglers to the small shops selling the contraband and the go-betweens selling them on from there – won’t pay tax on their profits or deduct income tax from their employees.

Efforts to curb the spread of the coronavirus have had the unforeseen consequence of driving many businesses into the informal sector, the most obvious examples being hairdressers and beauticians.

Even once restrictions are lifted, many are likely to opt to stay in the informal sector and avoid the rent for big premises, the salaries for supporting staff, and tax obligations associated with being a formal enterprise.

The informal cigarette distribution network is probably here to stay.

It is bigger than before, and it can expand into other products – like alcohol, which is also highly taxed.

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COMMENTS   27

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The cost is much much higher. These are estimated customs and excise losses. What about VAT and the recycle effect, where the money paid to the legitimate tobacco sales outlet is recycled back into the economy once again generating VAT. The illegitimate income is neither taxed nor banked and a portion probably finds it’s way outside the country. The surge in positive cases shows that banning cigarettes has done nothing to stem covid but has created a thriving criminal market with no measurable corona benefits.

The judge got this so wrong when he applied the test of rationality of the minister’s arguments. To claim her decision was rational without looking at the effect is the worst decision I have seen in a long time coming down from the bench. He even went as far as to say that she does not have to make a good or best decision it only has to be rational, which is insane. As a politician rational cannot be the test else we are in deeper trouble than we think.

The govt argument presented to court was incoherent, thin and inconsistent.
Fita actually presented strong arguments, and BAT’s is even stronger.
Nonetheless, it should be remembered that the position of chief justice is a political appointment and therein lies the problem. Mogoeng Mogoeng will soon need to be replaced.

Is the judiciary also failing the people of SA as well?

When the USSR started to implode and they could not pay workers any more, the workers said: “they pretend to pay us, and we pretend to work”. In sunny SA the government pretends to act responsibly with our tax money, and we pretend to pay our taxes.

The article Where Can A Blue Collar Worker Find A Suitable Financial Planner is a case of robbing the poor to feed the rich. Everyone works for their own pockets. The financial industry robs people to feed the rich. The best investment for an individual is a good Exchange Traded Fund

Yanni …all due respects …you are taking up valuable “Real estate” in the comment section

Come back when you can share something most don’t know of

Morning Yanni…Did you read the article…?
Have a great day further & stay out of heavy traffic.
Cheers.

Lmao, ETF’s also rob you, just rob you a bit less than the rest

would like to see what would happen if the legitimate liquor and tobacco industry followed the route of the taxi-industry with their threat of 100% full taxis & over the border trips – what would the anc’s attitude towards them – also a cool: “but they are really naughty now”??

Love the argument “we pay lots of tax money and employ lots of people”. Therefore we are good citizens and should be encouraged.

And this argument would also apply to organised crime if they would “also just make a fat tax contribution”???

The irony of the cigarette industry boasting how many covid hospital beds they could fund completely escapes the health damage this industry causes!

Seems like a nanny state slippery slope as is nowhere, in the civilised world anyway, but go for it. In broad terms I agree but surely people should be informed then have freedom of choice with a system rigged to make them pay for their poor choices? What about alcohol, gambling and leisure pursuits that could end in injury or death etc etc; ban them too?

Just asking.

It’s the greedy people who PROFIT from the KNOWINGLY unhealthy products they inflict down the line to their “clientele” who are the MAIN ones who must pay for the consequences of these self-enrichment schemes that ultimately benefit only themselves.

Taxing the stupid clientele, who buy these products to their (and their families!) long-term detriment, is NOT a sufficient mechanism.

Businessmen have a CHOICE as to WHERE they want to exercise their talents. The mission of business is NOT making money – at any costs – for its own sake.

Bring benefit real, long-term benefit to the community. And the profit will follow.

There is NO “or else”!

Jonnox I did not actually want to reply to you, but there is no ‘down-vote’ button.

Gee, Experienced …

No need to be so shy.

Come up with a good counter-argument instead.

That would be a useful contribution.

By this “logic”, the following industries should be banned too:

Any processed meat makers
Butter and cheese makers
Makers of sweets and chocolates
Coca-Cola and other fizzy drinks
Simba and Lays for making potato crisps
Garages who sell pies and much of the above

Etc etc etc.

Your ONLY true wealth is the health of your body.

NOTHING else matters once you have bad health.

Sadly, this trueism only dawns on most people when it’s too late – usually after a lifetime of a – in many cases – a CONTINUED, and willful choice of a bad diet.

If you want to privately stuff yourself with cigarettes, KFC and Coca Cola, good luck to you!

But don’t think I (or government) should become your business’s praise-singer and make way for you, if you want to make money for yourself marketing ill-health suicide-pills to my kids.

And that “because you pay lots of taxes and employ lots of people” this gives you heavenly immunity from criticism, and somehow makes you the sort of inspirational business I or anyone else should endorse in our community.

Not … going … to … happen!

The judges should be guided by the legal opinions in all the other countries that banned tobacco for best practice.

Oh, wait….

If you can make a living with “Illigal Trade” in whatever, Go for it. Screw the gavamunt

All drugs should be made legal and then taxable.

Currently the worste drugs are legal that being Alcohol (the most potent from of brain killing drug) and those seemingly harmless food ingredients in processed foods that a child can purchase if they they are tall enough.

Legalising drugs:
The war on drugs by police will end, new business will start and a new form of tax revenue will open.

At the moment good productive citizens are taxed whilst criminals pay nothing that is why SA is Gangsters Paradise.

Massive tax avoidance was alive and well as a result of the ANC long before Covid 19. Now it has gone into hyper drive.

The ANC has ensured this – the law of unintended consequences.

This has nothing to do with cigarettes, we all know they are unhealthy. So is drinking a bottle of vodka a day or drinking 5L of coke a day. However, is it not our constitutional right to buy what we want, when we want.

The new culture, in the ever shrinking tax paying section of society is now very simple:

You pretend there is a deadly virus and stop me earning an income. No problem, we will do everything legally within our power, go above and beyond what you can ever comprehend, to ensure we drastically reduce or STOP your income in the form of taxes!

To a degree a tax revolt is already in place. As a matter of principle people are paying contractors, sme’s hard cash avoiding SARS.For many years billions of Rand is in circulation in the business world that SARS knows nothing about.

I suppose they meant to say “Tax Evasion”?

Tax Avoidance has always been legal and in South Africa, not just legal but a moral obligation.

Anyone paying Tax in South Africa which is Avoidable, is voluntarily aiding and abetting Organised Crime!

Tax Avoidance has always been legal and in South Africa, not just legal but a moral obligation.

“Government seems oblivious to the dangers of letting the genie out of the bottle with its continued sales ban on tobacco products”.

If doek-head is making money from the illegal ciggie trade, then she is not “oblivious to the dangers of letting the genie out of the bottle . . .”.

I’ve heard of someone who were fire from a company for selling cigarettes. Legally it was the correct action by the company, but only because of this crazy temp law.

The excise lost to SARS (meaning all of us) is really petty cash compared to the real cost of the Ban.

The main result of Prohibition in the US (banning alcohol), despite being introduced with good intentions (and not to finance the ruling party and its cronies) was to divert trade from the regulated trade to petty mobsters and gangs, giving rise to the the likes of Al Capone, the mafia and other crime families. Their superprofits (untaxed, of course) enabled them to build financial war chests and buy the best weapons (e.g. “tommy guns”), best lawyers and worst politicians. No doubt SA, with its existing criminal gangs and gangster mobs will suffer the same.

A further cost is to smokers’ health. While cigarettes are freely available, they are of poor quality and the low-tar brands are not available from “take it or leave it” pushers. Vapes and e-cigarettes, which are far less harmful are not readiy available, forcing smokers to resort to the high-tar brands which are. So much for “health”.

Given her stepson’s involvement (and who knows what other Zuma family) in the tobacco trade, Dr Virodene should have recused herself. But given the ANC’s contempt for the Rule of Law and good governance, Crook-in-a-Doek did no such thing.

Ironically, if every single smoker in the country immediately stopped smoking and stopped buying illicit cigarettes, the government would quickly legalize tobacco sales again.
Why? Because this move to try to shift the SA cigarette market from the hands of some to the hands of others, would have failed and the only way to revive that economy again would be to legalize it.

End of comments.

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