The issue of sin taxes and illicit trade was tackled at the online Tax Indaba by Professor Corné van Walbeek, director of the research unit on the economics of excisable products at the University of Cape Town; author and illicit trade expert Telita Snyckers; and Keith Engel, CEO of the South African Institute of Tax Professionals (Sait).
Snyckers recently published a book, Dirty Tobacco, which looks at some of the dirty tricks in the tobacco industry. She was previously an executive at the South African Revenue Service (Sars), and for the last 10 years has been an international trade consultant.
Van Walbeek has been in research for nearly 20 years, focusing particularly on tobacco and alcohol, and to a lesser extent, beverages. The past four months have been spent specifically looking at the ban on tobacco during the lockdown period. A number of surveys were conducted on how smokers responded during the lockdown.
Engel was chief director of legal tax design at National Treasury from 2000 to 2013, and said that back then he thought excise taxes were easily enforced, and that money could be raised quickly without much effort.
Easy money passing through Sars’s net
Snyckers agreed that such taxes should be easy money for government, but said this is only true where there is proper production control in place – and there isn’t. Using alcohol as an example, she said: “Even before the lockdown, we saw that 15% of the alcohol in South Africa was illicit. In some places in the country it was 40%.” She added that: “Illicit alcohol kills.”
Snyckers also said that across Africa “as much as 80% of malaria medication is fake … we see weak excise policy … and big gaps in revenue collection”.
According to Van Walbeek, the amount of revenue collected through sin taxes in a normal year is R14 billion for tobacco, R25-30 billion for alcohol, with R3-4 billion from the newly imposed sugar tax.
In terms of cigarettes, before the lockdown about a third were sold at such low prices that all excise taxes could not have been paid. During the lockdown, 100% of cigarettes sold in South Africa were illicit.
Engel asked who the players in the cigarette space are, and whether all the producers are involved.
Van Walbeek said the market is divided between international and local companies.
The international players are British Tobacco, Philip Morris, Japan Tobacco International and Imperial Tobacco. These ‘big tobacco’ companies were affiliated to the Tobacco Institute of South Africa (Tisa), which has now ceased to exist.
The southern African producers (including those in neighbouring countries), fall under the Fair-Trade Independent Tobacco Association (Fita), consisting of some seven members, the notable ones being Carnilinx and Gold Leaf Tobacco. “During the lockdown it was found that they had greatly increased their market share,” said Van Walbeek.
Snyckers said that when one looks at both the small players and the large players, the majority of illicit cigarettes had been smuggled in from Zimbabwe.
But the dynamic has changed and it is now thought that most of the illicit tobacco is produced in South Africa and is not necessarily fuelled by the smaller manufacturers.
Globally, there is a lot of evidence that shows that multinationals are complicit in supplying the illicit market.
“When it comes to tobacco smuggling, criminality seems to be part of their DNA,” said Snyckers.
Control of tobacco excise tax
Snyckers said that tax is only paid on packs of cigarettes manufactured in South Africa, and producers can under-declare the manufacture of packs of cigarettes. This is easy to do as Sars has no production controls in place.
One cannot tell whether tax has been paid on a pack of cigarettes sold in South Africa as the customs ‘diamond stamp’ is easily forged. The stamp also does not indicate where the pack was manufactured. In contrast, the mark used in the ‘track-and-trace’ system can be scanned by an enforcement officer (or the buyer), and will indicate where it was manufactured (excise tax is payable at the time the pack of cigarettes is manufactured, and the mark or stamp indicates that tax has been paid).
A packet of cigarettes can be declared as having been produced for the export market, and can be exported and smuggled back into SA tax-free.
Alternatively, papers for export can be forged to show that the consignment has apparently left the country.
Snyckers explained that the international companies can be engaged in the ‘oversupply scheme’, saying that in May, South Africa exported more cigarettes than it had done over the previous five years. In that one month, South Africa exported more packs to Namibia than would be smoked in a year.
“This is a classic oversupply scheme,” she said. “What it suggests is that the cigarettes were being exported to Namibia, but with the intention that they would be smuggled back into the country.”
Some 90% of those exports were produced by two companies, and Snyckers said there aren’t that many companies that can produce that volume of cigarettes.
Controlling the supply chain
Snyckers said other countries have introduced ‘know your customer’ rules, which means tobacco companies cannot sell their product ex-factory and say it isn’t their problem; they are held accountable for their supply chain.
She added that the track-and-trace system has been introduced by many countries, including Kenya. The revenue authority is in control of the data and the system used to stamp the packs of cigarettes.
Snyckers said the diamond stamp used by Sars is useless. However, it has not introduced another system and has cancelled the tender process for a replacement system.
Snyckers suggested that Sars introduce production control and expand its audits. It should check the inputs into the manufacturing process, such as the importation of cigarette filters.
Sars hasn’t, however, been given the budget it needs to upskill its auditors in this area.
Curson visited the British American Tobacco plant in Kenya in 2019, at the manufacturer’s cost, to see the track-and-trace system in operation.