Illicit tobacco sales deprive the fiscus of more than R19bn a year – Batsa

Tobacco giant says criminals have flooded the market.
The government was warned that the Covid-19 tobacco ban would result in an increase in the illicit tobacco trade and this has come to pass. Image: Shutterstock

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

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

Background

The tobacco ban was imposed by the Minister of Co-operative Governance and Traditional Affairs (Cogta) on May 28, 2020, under Regulation 45 of the Covid-19 national state of disaster.

The government was warned that the Covid-19 tobacco ban would result in an increase in the illicit tobacco trade.

Read:
Batsa questions indefinite tobacco ban
Consumer criminalisation could encourage a culture of tax avoidance

In May 2020 Batsa requested urgent clarity on the decision-making process that led to the tobacco ban. Batsa’s court action against the Cogta minister was delayed, and was only heard after the tobacco ban had been rescinded in August 2020.

Read:
Government chokes on Batsa’s urgent court application
Tobacco ban unconstitutional and invalid

The judgment was handed down in December 2020, and the tobacco ban was held to be unconstitutional.

Cogta was also not able to prove that the tobacco ban had any positive impact on health.

In commenting on the judgment, Batsa warned of the “explosion in illicit trade that occurred during the ban on tobacco and vapour products”.

The Human Sciences Research Council published research showing that illicit cigarettes had been widely available during the Level 5 lockdown.

Ipsos studies

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

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

The latest study, which incorporated “mystery shoppers” who were tasked with purchasing the cheapest cigarettes available at an outlet, indicates an explosion in sales of illicit cigarettes:

  • Four out of five stores in the Western Cape (80%) sell cigarettes below the minimum collectible tax (MCT) rate of R22.79 per pack, as do almost 70% of outlets in Gauteng. This is a significant increase compared with previous research. “Cigarette packs that sell for less than the MCT should be considered illegal, as this means the manufacturer has not paid the minimum amount of duties to Sars [South African Revenue Service].”
  • The number of garage forecourts across the country selling illicit cigarettes has quadrupled in the last year.
  • It is possible to buy a single pack of 20 cigarettes for as little as R7 in many retail outlets nationwide. This is even cheaper than the lowest price of R8 found in the October 2021 study.
  • “Products bearing trademarks licensed to or owned by Zimbabwe-based Gold Leaf Tobacco Corporation (GLTC) and Carnilinx, a member of South Africa’s Fair-Trade Independent Tobacco Association (FITA), continue to win this illegal price war.”
  • The majority of stores in the Western Cape (79%), the Free State (74%) and Gauteng (69%) sold cigarettes below the MCT, demonstrating that “the manufacturers could not have paid due taxes on these products”. This is a significant increase since the previous Ipsos study.
  • Brands “owned by or licensed to GLTC Zimbabwe are the most widely available at illegal prices, with almost half (44%) of purchases made below MCT. Purchases below MCT of brands owned by or licensed to GLTC South Africa rose by 17% in the last year”.
  • “More than half (52%) of purchases of brands owned by Carnilinx were below MCT.”
  • The study did not find any Pall Mall cigarettes sold below the MCT, even though it was the cheapest available brand in 642 stores (around 14% of total stores included in the sample). Pall Mall is owned by Batsa.

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

Read: We pay our taxes, says cigarette maker

Moloto added that illicit tobacco sales “should be tackled as a matter of utmost urgency … They are depriving the fiscus of more than R19 billion 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, search and seizure operations were carried out on cigarette companies and manufacturers in KwaZulu-Natal, the Western Cape and Gauteng. Master cases to the value of R51 million were seized. A master case holds 50 cartons or 10 000 cigarettes.

In March, 2.31 million sticks of cigarettes and narcotics were confiscated at residences belonging to a well-known cigarette supplier in Phoenix, Durban.

Kieswetter said Sars is “building its capability to make it hard and costly for those traders who choose to be non-compliant”.

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

Moneyweb asked Moloto for his views on how the illicit tobacco trade can be eradicated.

He replied that the illicit trade in SA is “multi-faceted” and that Batsa is “calling for Sars to take several steps to stamp this out”, listing these steps as follows:

  • All manufacturers must be compliant with Sars’s production counter rules.
  • SA should immediately introduce a minimum retail sales price of R28 for a pack of 20 cigarettes.
  • South Africa needs to implement stricter controls on all manufacturers and borders, and Sars should immediately implement its CCTV camera regulation.
  • The country must ratify the WHO [World Health Organisation] Illicit Trade Protocol to fight illicit trade.
  • South Africa should adopt a comprehensive track-and-trace system aligned to the WHO Illicit Trade Protocol, across the tobacco industry.

Barbara Curson holds shares in Batsa.

Curson visited the British American Tobacco Kenya tobacco plant in 2019, at their cost, to observe the workings of the ‘track and trace’ system for tobacco products.

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COMMENTS   11

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Self-righteous BATSA are more concerned about a R19bn a year loss to the fisc than the deadly nature of their own product.

How much tax does it pay, and does this remotely cover the cost of treating the people in state hospitals who are dying of cancer as a consequence of the utilisation of BATSA’s products?

An immoral argument is invariably an illogical one.

Then what about the other drug, alcohol? Do you extend your argument to that?

I remember when Tony Blair got upset with UK scientists who he had commissioned regarding research into the place for medicinal marijuana, because they wrote back saying that we are more worried about the use and abuse of alcohol as a cost to society.

What they were saying is that you cannot isolate one drugs, like cigarettes, you have to look at all drugs simultaneously, and the one with the biggest cost to society is alcohol.

So, that makes your argument immoral as well.

It is clear that the high tax on cigarettes is turning smugglers into millionaires as during prohibition in America. When the tax raises the price to an unaffordable level for the average person, there is no effective difference between taxation and prohibition. This is why the covid ban had zero impact on the supply of cigarettes. The market has already adapted to prohibition, long before the start of the covid ban.

This shows how the market forces of supply and demand are stronger than any government force. Consumers are simply conveying a message to SARS to get out of the way. Consumers cannot afford SARS. They are still able to afford cigarettes though.

The logical solution is for BATS to also sell “illegal” cigarettes. They can take back their market share by flooding the market with their “superior” product at a competitive price for the benefit of the consumer.

The people who are dependent on the social grant refuse to contribute to their own grant by paying tax on cigarettes. They expect law-abiding citizens to finance the entire grant. The ANC government is lying in ambush to extort taxes from honest people for the benefit of criminals.

And the mighty Kieswetter and co manage to recoup R51 mil of an estimated R19Bn and they think they are having success — Fools !!

Drop the taxes and the illegal ones won’t be so competitive.
More sales means more tax. A few deaths isn’t a serious problem, Undertakers also have to make a living 🙂

Now that is the best business model! Undertakers basically have a captured market. He can point to everyone who passes him in the street and say – there goes a client of mine…This is the typical grudge purchase.

Reduce the tax by 50 percent to get greater tax compliance. You losted the people along the way who pay the tax.

What markets, organizations and institutions have criminals not flooded in South Africa today? when your own ( former) President gets away with criminal activities, what hope is there for the rest? The Guptas remain outside of the law, criminal members of Parliament and Municipalities remain in their positions and errant BEE appointees in business get a slap on the wrist and hefty retrenchment packages!
The morality of the new South Africa needs a complete overhaul…but only the majority can make that happen whilst the minority continue to foot the bill!

“Tobacco giant says criminals have flooded the market.” …. Because criminals have flooded Parliament.

Our economy can not rely on tax from cigarettes. Batsa is creating fear as its marketing strategy to the public. The economy and revenue should be built on a healthy and sustainable economy. Infact we should be discouraging smoking.

Maybe not but to put it into perspective is that is the size of the Whole Education administration budget of this country in 2021 !!

End of comments.

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