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Cigarette war goes radioactive

Tax justice group says two of every three cigarettes sold in SA is illicit, robbing the fiscus of R8bn a year. Small tobacco manufacturers say the group is a front for Big Tobacco.
It seems forcing smokers to get their fix illegally during the ban has normalised the act among retailers and consumers. Image: Shutterstock

A new report by Tax Justice SA (TJSA) finds that two of every three cigarettes sold in SA are illicit, making SA possibly the world’s largest black market for cigarettes.

This is costing the fiscus R8 billion a year. A TJSA researcher visited 43 retail outlets in four different cities and in all but one of these outlets was able to buy cigarettes for less than R20 a pack.

“TJSA considers all cigarettes sold at R25 a pack or below to be illicit, since such a price cannot possibly cover the cost of manufacture and distribution on top of the minimum collectible tax (MCT) of R20.01 due on each pack (R17.40 excise plus R2.61 Vat),” says the report, which formed the basis of a video documentary.

Read: Tobacco giant calls for zero tolerance on tax evasion by illicit suppliers

TJSA points the finger of blame at members of the Fair-Trade Independent Tobacco Association (Fita) and Gold Leaf Tobacco Corporation, which recently broke away from Fita.

Ban

The government placed a ban on all cigarette sales on March 27, 2020 to help slow the spread of Covid-19, but a study by University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep) found that at the height of the ban, 93% of smokers were able to buy on the black market.

Read:

A Reep study in July 2020 showed that market share by multinational tobacco companies (British American Tobacco, Philip Morris International, Japan Tobacco International and Imperial Tobacco) had collapsed from 74% to just 17%.

The Reep authors have called for a substantial increase in excise duties on tobacco on the grounds that the market appears able to bear much higher prices.

“Tobacco control advocates agree with our recommendation that the excise tax be substantially increased and are calling for a doubling of the excise tax when the next budget is tabled in parliament,” says the Reep report. “The evidence from the surveys conducted by Reep suggests that this is feasible.”

Market share

Market share has slipped from multinational tobacco producers to “smaller” ones like Gold Leaf Tobacco, which Reep estimates captured a 26% share of the market, Carnilinx (14%) and Best Tobacco Company (11%).

When the ban was lifted on August 18 last year, after 144 days, the effect of lockdown on the smoking landscape became clearer.

Forcing smokers to buy illegally during the ban had normalised the act of selling and buying illicit brands for both retailers and consumers.

Fita brought a court action against the government late last year to have the ban lifted. This was ironic, noted Reep, as its member had benefitted disproportionately from the sales ban. “They have greatly increased their share of the market within our sample, and sold their cigarettes at hugely inflated prices.”

In December 2020, a Reep study found multinationals had lost between 10% and 14.4% market share, while local producers enjoyed market share gains of between 11% and 400%.

Individual companies’ share of cigarettes bought by survey respondents before, during, and after the sales ban

Source: Reep study, ‘Back to normal? Smoking and quitting behaviour in South Africa after the tobacco sales ban’, December 2020

Fita head Sinen Mnguni says the research by TJSA cannot be given credibility and accuses TJSA of being a front group for “Big Tobacco”.

“Until groups like Tax Justice South Africa play open cards and disclose who their funders are, their independence will continue to be questioned.”

The Reep study shows that cigarette prices went up an average of 5.8% after the ban was lifted.

Multinationals increased their prices by nearly 5%, compared with non-multinationals, which increased prices by 30%.

Pointing to the same Reep study relied on by TJSA, Mnguni says it shows the lowest average price of cigarettes was R23.60 for a pack of 20. “This suggests that the ultra-low-price cigarettes, which were a characteristic feature of the market before the lockdown, have largely disappeared. From a public health perspective this is good, because it will discourage cigarette use, especially among the poor sections of the population,” reads the Reep study.

Says Mnguni: “This is an independent study by Reep which contradicts TJSA’s claims based on anecdotal evidence of cigarettes being sold for less than R20 a pack.”

SA Tobacco Organisation questions TJSA’s integrity

A statement by another industry body, SA Tobacco Organisation (Sato), of which Gold Leaf Tobacco is the largest member, likewise questions the integrity of the TJSA Crimewatch documentary and says “there is no evidence to suggest the [scenes] have not been staged”.

“We have noted that Mr Yusuf Abramjee [TJSA’s founder] has repeatedly through the years defamed our member Gold Leaf Tobacco Company (GLTC),” says a statement issued on Thursday by Sato.

“His recurring theme, through his various forums over the years, makes it apparent that he is perpetuating a lie and targeting Gold Leaf Tobacco, seemingly at the instance (sic) of big tobacco. It is not difficult to see that the entire expose was a commercial for Big Tobacco.

“The show demonstrates Batsa [British American Tobacco SA] brands selling for R40-R50, whilst we were able to conduct a test purchase of a pack of 20 Rothman’s at R17.50 [a Batsa product]. These are matters which TJSA is silent on. Interestingly, TJSA is also silent on the much larger illicit industries, such as alcohol and fuel.”

Read: SA has the world’s biggest illegal tobacco trade: Batsa

And this from Sato: “We would like to invite all tobacco manufacturers, multinational and local, to open up [their] records for scrutiny by the public. We are confident that nearly all of the profits made by multinational players are being siphoned out of the South African economy, which amount to billions of rands, through complicated measures of profit-shifting and fancy royalty arrangements.

“These matters of such a serious nature, should be ventilated through our judicial system and investigated by the real law enforcers and not by speculative journalists.”

TJSA’s response

Replies TJSA founderAbramjee: “Fita’s response is a classic deflection tactic used to avoid having to explain why they and their members have been caught red-handed.

“Fita might claim their brands are in the clear but, as the report shows, two-thirds (23) of the 34 brands we bought at below the legal tax threshold (minimum collectible tax) were brands belonging to Fita members (15) or their breakaway partner Gold Leaf Tobacco Corporation (8).

“We bought Red & Black cigarettes, made by Fita member Afroberg, for just R7.20 a pack – a price that amounts to barely a third of the taxes that should have been paid on that pack (R20.01). A full list of the Fita brands sold at below MCT is contained in the report.

“This is industrial-scale tax evasion that is robbing South Africa of R8 billion a year. That’s enough money to vaccinate half of our population.

“Mr Mnguni should be investigating how his members’ products could possibly be selling at these blatantly criminal prices and robbing our nation of vital funds.”

Gold Leaf, says Sato, pays a steady R200 million to the SA fiscus each month. “Our member’s market share, as researched by independent researchers, confirms that our member’s sales are in conformity with [their] tax contributions, thereby rubbishing all and any allegations concerning any illicit activity of GLTC.”

Replying to Sato’s statement, TJSA says it “notes the libellous comments about our organisation and founder Yusuf Abramjee made by the spokesman for Sato, a body recently established as a front for its only member, [GLTC].

“TJSA stands by its independent investigation that showed eight brands belonging to GLTC being sold at prices below the MCT level. A full report, including hours of video footage, has been delivered to SA Police Service (Saps), SA Revenue Service (Sars) and the departments of finance, health and trade.

“TJSA would gladly accept Sato’s invitation to look at GLTC’s books to establish how their products are being sold at prices that suggest millions of rand are being evaded in tax.”

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COMMENTS   17

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Illicit cigarettes are big ANC money spinners — Always have been.

Can’t collect taxes on existing cigarette manufacturers.
Can’t manage and control this tax collection.
Can’t or won’t bring defaulters to book.
Can’t rope in this money spinner for a select few.

Far easier to increase PAYE with a simple stroke of a pen.

Indeed. The smuggler boss of one of the implicated companies funded a certain loathsome, gap-toothed politician’s Nasrec campaign. Which perfectly explains her enthusiasm for lock-downs and bans.

Mazotti must stop playing with fire and stop supporting idiotic groups like the EFF. It gives them some form of false legitimacy.

If TJSA members and GLTC contend nothing is out of place, they must just show how much they are paying to SARS, easy as that right?

Good article! We need similar in depth research into the liquor industry. It seems wrong to penalise all users as well as the fiscus with a total ban because some outlets are unable to get their patrons to drink responsibley and within legal bounds. Surely we can identify binge drinking hotspots and put appropriate controls in place which would lead to a reduction in alcohol related trauma events?

The fact that those who occupy the emergency wards due to alcohol abuse are not Muslims, Christians or Buddhists, holds the solution to the problem.

People worship and make sacrifices for their religious beliefs. The faith communities avoid overindulgence and violence in honour of their beliefs. The unfaithful sacrifice their lives for their beliefs. They make the sacrifice according to their belief system. Violent behaviour is the national sport in some communities. We are living in a secular state. People have the constitutional right to express their beliefs and to sacrifice whatever they choose as long as it does not interfere with someone else’s rights.

What this boils down to is this – shebeens should employ their own emergency staff if they want to be licenced as a place of alcohol worship and bloodletting self-sacrifice. This should not be the hospital’s problem or the taxpayer’s problem.

No study needed. It’s obviously fine dining restaurants and family franchise chains where people get drunk and then engage in knife fights on a Saturday night. Close town all of these are we’re fine….

This is nothing new. It has been going on for ages and the Police and Prosecutors can fine people on beaches but cannot prosecute ONE person for this grand theft. This ANC government is probably indirectly complicit in this illicit trade.

maybe tell that hat wearing clown to go do a days real work -not that he has the ability nor the inclination. A failed state with no rule of law!

Big Tobacco runs a monopoly on the South African tobacco market, in a market where you cannot advertise or market products legally. Large tobacco house offer shopkeepers and retailers free shelving and display units and in return they get prime placement for their products.Law dictates that a maximum of roughly 70% allowed for one brand, the remaining visibilty is generally taken up by the other 2 established tobacco houses therefore the only way these small manufacturers can launch/create a demand for their product is to incentivize the only person that CAN market their product ie the person behind the till. They do this by offering a significantly larger margin on their product by selling cheap and in turn the shopkeep markets the product to the man on the street. The cost of manufacturing is very low, even lower for the established firms as they produce in larger quantities.

it’s very sad that smaller players face such high barriers to entry in killing off their potential customer base

LOL, Duncan!

Revenue share collapsed 74 to 17%!It’s hard to feel sorry for an industry that knows it is killing its users. That one part calls out the other and then tries to claim some kind of moral high ground is ridiculous. Let me get this right… as a non-smoker who gets an asthma attack if I smell the stuff, and who has had two close relatives and many others die around me from enjoying their International Passport to Smoking Pleasure, it should matter to me that one group is not handing over revenue to a criminal cabal of a government in the race to kill its consumers faster?

“Until groups like Tax Justice South Africa play open cards and disclose who their funders are, their independence will continue to be questioned.”

= “We can’t dispute the facts, so we’ll go for the ad hominem.”

I changed my lifestyle 13 months ago by choice my wife included when we turned 68. I lost 66kgs and my wife 40kgs. I stopped Alcohol although now and again I will have a couple of Whiskies. Carbs out, Calorie count daily and workout 6 times a week on 2 Treadmills I bought. However I smoke and used to frown when I heard of people buying illegal. However my tune changed when I was forced to outlay R34000.00 on a non Scientific decision during the Prohibition. I am still buying illegal and will continue until I recover this crazy outlay working on the deficit what I was paying for a carton of Winston from Makro. Another 5 months to go besides working through my bulk stash. I will then revert back to not being a Criminal anymore unless they reinstate the ban again.

Sorry Tito and Kieswetter. Just hang in a little longer.i will render unto Caesar what is due. But Caesar got stupid and the Empire fell.

W

The writer forgets one important point.

When taxation is increased to a level that is unreasonable people will find a way to avoid it. Consumers couldn’t care less because their cigarettes are cheaper.

They should first focus on the basics and sort that out.

End of comments.

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