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Illicit cigarette industry beats Sars

Cigarette brands selling for less than the payable tax have gained a 27% market share in SA.

During the last few weeks, several newspapers have been running advertisements under the banner #takebackthetax, with slogans such as “Petrol will be cheaper if we take back our R7 billion” and “Vat doesn’t have to increase if we take back our R7 billion”. Another alludes to the fact that the distressed school system could employ thousands more teachers.

The R7 billion refers to tax evasion – every year – by the manufacturers and distributors of illicit and illegal tobacco products in SA, says the Tobacco Institute of Southern Africa (Tisa), which has embarked on the campaign to highlight the problems facing legal and tax-compliant cigarette manufacturers in SA.

“The legal industry must compete against an organised illicit cigarette industry that sells cigarettes for as little as R10 per packet although the minimum tax payable per packet of 20 cigarettes amounts to R17.85. It is obvious that due taxes are not paid,” says Francois van der Merwe, CEO of Tisa.

In 2015, a judgment in the Eastern Cape High Court found that tobacco products selling for prices less than the minimum collectible tax must be illegal. In that matter, relating to sales of Gold Leaf Tobacco Company’s Savannah brand at R8 per packet – even then well below the tax owed to the South African Revenue Service (Sars) – the judge found that “the logical inference to be drawn is that no excise duty was paid in respect of the cigarettes in question”.

In total, brands selling for less than the payable tax have gained a share of nearly 27% of the total cigarette market in SA. Tisa calculates that tax evasion will cost National Treasury around R7 billion in lost revenue in the current financial year and a total of nearly R30 billion since 2015 when Sars stopped policing dubious manufacturers.

Sars acknowledges the problems and associated dangers of illicit cigarettes. A policy statement on the Sars website states: “Illicit cigarettes are not just harmful to the economy, but often also to smokers who consume them with low quality dangerous substances. A large number of illicit cigarettes are consumed in South Africa every year. That means we lose in excise revenue every year. That sort of revenue would build quite a few more schools, roads and houses which we need.”

With the introduction of a new Sars compliance programme in 2013, the then commissioner of Sars, Oupa Magashula, said that “we believe that if you are making your fair contribution and doing the right thing, you deserve to know that everyone else is doing so too!”

The programme listed the illicit cigarette industry as one of the big problem areas with regards to tax evasion. “We are aware that a significant number of illicit cigarettes are consumed in SA each year, amounting to a considerable loss of revenue,” according to the policy document (published in 2013). Unfortunately, soon after Sars enforced its plans for stricter enforcement against a number of transgressors, Minister of Finance Pravin Gordhan was replaced and senior personnel at Sars were moved aside in what seemed like a pertinent strategy to make life easier for tobacco smugglers.

In one of several parliamentary investigations into the mismanagement of government institutions and state enterprises, Gene Ravele, former chief enforcement officer at Sars, has testified that cigarette manufacturers have not been inspected since at least 2015.

In addition to the loss of much-needed tax revenue, illicit cigarettes pose a health risk.

The Economics of Tobacco Control – an authoritative study of the industry by economists Iraj Abedian, Rowena van der Merwe, Nick Wilkins and Probhat Jha of the Applied Fiscal Research Centre at the University of Cape Town published in 1998 – features research done in collaboration with 34 international experts into the effect of taxation on the consumption of tobacco.

The study found that the best tool for reducing smoking is to levy a substantial tax on tobacco products and enforce compliance. One of its conclusions was that excise duty is a potent mechanism for reducing consumption in SA because consumers in developing countries tend to be more price-sensitive. “Optimal taxation policy on cigarettes will maximise revenue generation, while at the same time constraining consumption and promoting public health.”

Sars did not respond to questions from Moneyweb, save for an email to acknowledge that they received our enquiries (three weeks ago).

Meanwhile, illicit cigarette factories are raking in billions. A recent report by Ipsos, the third largest research agency in the world, found that one of the suspicious brands has grown to be the second biggest cigarette brand in SA. The report found that RG, a Gold Leaf Tobacco Brand selling for an average of just more than R10 per packet, is now the second largest selling brand in SA after Peter Stuyvesant.

The question remains: how it is possible to sell packs for less than the payable tax, year after year?

COMMENTS   34

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Obviously they are being protected from up on high by those in charge for an equally tax free cash reward. Thus SARS lose twice…

No government has money; governments administer the money of the tax payer and so SARS don’t ‘lose’ anything, ever: it is my money, not theirs…
Good guys in charge, bad guys in charge – this is the point they ALWAYS forget.

phill

Exactly

Mmmmm, like Julius Malema, Nkosazana Dlamini-Zuma, etc – all kept smoking hot by Adriano Mazzotti.

BTW – it is not SARS that loses; it is a certain ‘taxed-to-death’ minority…

The question remains: how it is possible to sell packs for less than the payable tax, year after year?…exactly the same as the questions that remains, how is it possible to pay for services(TAX) and receiving less and less, from my payable tax, year after year?

SA is broken, the core is rotten, the leaders is corrupt and incompetent. Police, NPA, Customs investigators for sale to the highest bidder – the rotten core.

My bet is Money Web will or should use your first paragraph as a future article

The lives of the poor have not gained traction

The middle class are being squeezed out of the economy

Its just the current governing party that is getting extremely rich off taxes

Hopefully Jacques Pauw’s expose’ has contributed to this focus on SARS. Despite JZ saying ” State capture? What State capture..? there is no smoke without fire and lets hope they will ALL get burned to the top..!

somebody needs to explain this to me:

assuming a markup of 100%, a packet cost R5 to manufacture?

how on earth did we reach a point where the tax on that packet is R17.85?

The amount is added irespective of thr cost

Sometimes one needs an opposing voice.No amount of tax will ever kill smoking. The present fault lies with SARS for encouraging tax avoidance by being greedy. Reduce the taxes to a more affordable level and compliance will increase, as will revenue.
Before you ask; I am not in the cigarette business and I kicked the habit 28 years ago.

In the mean time. Expat and tax collecting. No ocean to deep or mountain to high for the tax men on the hunt. Comes a tobacco farmer with a informal idea.

If this is correct it becomes clear that minister nene and commissioner kingon are completely in over their heads. Kingon wants to chase bankrupt small businesses for not filing returns and billions are stolen from under his low yielding nnose. Who is in on the stealing? Yes who in government and at sars.

I think those involved in the illegal sigaret business are very dangerous criminals. They will simply take you out if you open your mouth, or as my biology teacher used to say back in the 80’s, they will kill you dead.

SAM and Danie I agree with both of you and it shows how SARS remains captured and cowardly; effectively allowing these gangsters to rule the roost because they are too well connected and too violent. Proudly brought to you by the ANC.

That is what happens when anything is taxed too much or outlawed unnecessarily – refer the Prohibition when in doubt.

Don’t let the 18.9 km distract. They could be right next door to SARS’ Head Office and nothing would be different.

“… with low quality dangerous substances” As opposed to the high quality dangerous substances found in legal cigarettes.

Isn’t Edward Zuma also in the tobacco business?

Yep. The Zuma clan were into everything that had big money and that was illegal.

And yet Kingon and his gang have the time to audit the income and medical expenses of a woman of nearly 90. Her income is just over R400 000 in total but she was threatened with a criminal conviction and forced to attend a SARS office in an attempt to sort the matter out. A SARS official has admitted it was wrong to audit her but there has been no apology. Oh, and don’t waste time with SARS CMO. The taxpayer’s complaint was rejected with a terse computer generated note.

A family member of mine and her husband work for a training college which went bust. The payroll manager deducted PAYE but didn’t pay it over to SARS and then disappeared with the money. Yet SARS demanded their PAYE. They drove to Pieter Maritzburg a couple of times to see Mrs Hyde (SARS auditor) and pleaded with her. All fell on deaf ears and apparently, SARS can still collect the PAYE from you. They had to cash out their savings to pay the PAYE (twice). Her husband died soon thereafter of cancer at age 43 and left her with 4 kids. She had to bake cakes for the home industry to keep going. But the SARS auditor couldn’t give a toss – they just care about their collection targets. That is a disgrace.

In SA SARS are essentially bagmen for the ANC and, as do all thugs, extract compliance through fear, not respect or honesty. As with SAPS etc the soft targets are much preferred to the well-connected and protected Gupta types.

SARS are the collection and distribution agency for the thieving cadres, zuma and the Guptas.

Interesting that all references on the internet as to who are the directors of this company have been suspended. This can only mean they have something to hide.
Perhaps there should be a tax revolt from all taxpayers until such time this company and its tax concerns have been resolved and exposed.?

Clearly cigarette taxes are to high.People will always smoke whether you like it or not.The only thing SARS and BAT and the other tobacco giants are saying is that they and only they must profit from sales.They clearly are working in tandem in a monopoly style consortium that has been circumvented.The health issue is a smoke screen to make them appear to be socially responsible and aware.If they really cared about the health of their customers they should cease operations immediately.It is a question of allowing other players into the market as well ,and to do so they should drastically lower taxes,and will thereby collect more tax revenue.This is what Mr.van der Merwe should concern himself with to grow the tobacco industry and not just the interests of primarily of BAT who essentially pay his salary.

There is a basic truth that writers seem to ignore – a country where the voting majority has the level of sophistication, experience, training, education and ethos like we have in South Africa, does not have a revenue service. In countries with similar demographics there are no structures or services. What we currently have are simply remnants of what were constructed under the previous regime.

Countries like south Africa have tribal chiefs who collect tribute on an ad hoc basis. This is basically what SARS has become under ANC rule – a tribal chief that collects only from the honest hardworking individuals, while protecting and turning a blind eye to the looters and criminals.

“What we currently have are simply remnants of what were constructed under the previous regime.”

ANC and their supporters can do nothing correct. Just steal and destroy and then like about it.

Whether the cigarette gangsters or the ruling gangstocracy has it makes no difference to me …

Aren’t Carnilinx Tobacco Company in the same category?

I just read that kingon was reappointed acting commissioner. Well he sure acts but delivers nothing. The man is an embarrassing relic. No substance at all. He should retire as should that other wizard…prof of everything dennis davis

If the illegal cigarette and taxi industries paid taxes – it must be wonderful being a taxi thug in this country – then that budget deficit looks much improved. We all know that the taxi industry is exempt from road laws but who said anything about exempt from taxes?

This is what you get when you overtax people.

Reality is the tax “lost” should never have been collectable in the 1st place.

Doff socialist guvmint employees.

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