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New study shows black market for cigarettes continues to grow

Nearly three-quarters of retail outlets in Free State, Gauteng and Western Cape are selling illicit cigarettes: Ipsos.
Image: Suzanne Plunkett, Bloomberg News

A study commissioned by British American Tobacco SA (BAT) – said to be free of interference from BAT – suggests the cigarette market has been given over to black marketeers, with four out of five outlets surveyed in the Free State offering smokes at below the minimum collectible tax (MCT) of R21.61 for a pack of 20.

Any pack of 20 cigarettes selling below the MCT of R21.61 is deemed to be illicit. Some packs were selling for as little as R10 and even R6 – meaning no tax could have been paid on these cigarettes.

The study says this is a consequence of the government’s imposition of a ban on cigarette sales in the early part of the Covid lockdown last year (now lifted). The ban allowed a black market for cigarettes to flourish, with the fiscus losing R8 billion a year in excise revenue.

Illicit cigarette sales were most prevalent in the Free State, where 81% of outlets visited were selling below the MCT price level, against 70% of outlets visited in Gauteng and 71% in the Western Cape, according to the Ipsos study.

“That’s almost a 10% increase on the figures recorded only a month ago before the big hike in tobacco sin taxes,” says Yusuf Abramjee, founder of Tax Justice South Africa.

“It is shockingly clear that the excise increase, which was double the rate of inflation, has triggered a full-scale price war among tax-evading manufacturers, who’ve been gifted more customers and even bigger profit margins.

“The government lit a fire under the illicit cigarette trade with the five-month lockdown tobacco sales ban last year that handed the market to criminal operators.”

The government had unleashed this monster and has a duty to get it back in its cage, added Abramjee. Illegal cigarettes are known to be pouring across the border from Zimbabwe, Mozambique and even Zambia, where SA’s high excise rates of cigarettes provide a god-sent opportunity to black marketeers.

The Fair-trade Independent Tobacco Association (Fita), which represents smaller tobacco producers based in SA, is unconvinced by the study findings and Abramjee’s conclusions, which point to some of its clients as the main culprits.

According to Ipsos, cigarettes produced by Gold Leaf Tobacco Zimbabwe (not part of Fita), Carnilinx and Afroberg Tobacco were most frequently found to be selling below the MCT level. According to a July 2020 study by University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep), 93% of smokers were able to buy smokes on the black market.

The same study found that the 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%.

Says Fita chair Sinenhlanhla Mnguni: “These so-called independent reports are now also being used as ammunition by Big Tobacco for anti-competitive purposes to smear the names and brands of independent local cigarette manufacturers as a way to strong-arm retailers into removing the products of smaller independent manufacturers off their shelves. This is an attempt to maintain the status quo and to keep certain players in the informal trade in order to protect the profits of multinationals in an anti-competitive manner. This perpetuates the illusion that the brands of local cigarette manufacturers must be illicit, given that they can only be procured from informal traders and not in formal retail spaces.”

Tax Justice SA has called for a commission of inquiry into the collapsed tax revenues from cigarette sales due to black market activity, though Fita says this will not achieve anything other than wasting taxpayer money and time.

“Fita members are all compliant with the relevant laws of this country which govern the tobacco industry and have at all times been co-operative with Sars in as far as its efforts in implementing measures to curb non-compliance in the industry along its value chain such as that of installing production counters on the machines of our members.”

Gold Leaf Tobacco Company (GLTC) is a member of another industry body, SA Tobacco Organisation (Sato), which issued a statement in January that Gold Leaf was paying tax of R200 million a 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,” said Sato.

Fita has turned the spotlight back at BAT, which was itself the subject of a report by Tax Justice Network in 2019 claiming it was shifting profits out of poorer countries to tax-friendlier jurisdictions.

Sato has called for all tobacco manufacturers, multinational and local, to open up their records for scrutiny by the public to determine where the tax leakage in the SA economy is occurring.

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Anything to deprive the ANC looters of some money !!!

No worries, Carnilnx Tobacco, A South Africa based and registered company, is selling their “JFK Virginia Blend” through every kafee in the Cape for a mere R16.00 retail, per pack of 20’s!

The ANC is protecting this illicit sector as they are the ANC’s blessers.

Mrs Z will be able to afford to take a holiday

So what ? The corrupt racist ANC is doing their level best to destroy legitimate private business in SA.

Where is our wonderful tax collecting agency called SARS? Too busy chasing the small man? Too politically problematical to do there job? I would guess the answer is both.

Looking for exotic car owners in CT & GP

All those lovely sin taxes…going up in smoke.

This was worsened by the lockdowns and the banning of (legal) cigarettes, many smokers turned to the “illegal” brands and have kept smoking them after the ban was lifted.

Market forces 1, Government 0

The illicit tobacco trade is a beautiful practical lesson in economic theory. Taxes act as a handicap that hobbles the legal industry and punishes consumers for acting within the law. The tax creates a unique competitive advantage for entrepreneurs who know how to break the law without getting caught. The combination of a relatively high tax rate and a relative incompetent and inefficient criminal justice system creates a wonderful business model for the smuggler.

To quote Waren Buffet – the tax law creates a strong “moat” around the business model of the smuggler. The tax removes the formal competition from the market. In short, the combination of high taxation and weak enforcement creates a gangster’s paradise. The covid restrictions on the trade was another huge shot in the arm, a subsidy so to speak, for the illicit trade. The tobacco ban was a government-sponsored ad campaign in favour of the illegal tobacco trade.

The system incentivises all entrepreneurs to break the law. It rewards unscrupulous and fraudulent behaviour. That is why even the legal cigarette companies will push product through their illegal “subsidiaries” to sidestep the taxes.

It proves that the consumer, and not the government, dictates the product and price to suppliers. The consumer uses the price signal to rule and regulate suppliers. The consumers voted for the free market and against the Central Coronavirus Command Council.

The marketplace is a ballot box and the consumers vote with their money every day. The majority party that rules the country is the free market, and not the ANC. The actual president, who receives the majority of the votes on a daily basis, is Johan Rupert and not Cyril. Luthuli House is a sideshow, a farce, a smokescreen to hide the fact that the owners of Remgro and Shoprite actually rule the nation in the most democratic manner, under the market mechanism, where consumers vote with their money daily.

As illustrated by the Canadian Bronfman family and the Seagram liquor dynasty. If it weren’t for prohibition in the US the Seagram dynasty would never have taken off. After prohibition the Seagram distillery became the biggest in the US and Canada.

I too buy black market cigarettes. I don’t even smoke.

Smokers are often people who have been bending the rules from a young age. They are the last people who will pay tax ‘because it’s the right thing to do’.

No Mr government, you killed the goose that was laying the golden eggs. That tax revenue will be gone for years.

Somewhat presumptuous, judgemental and bigoted, ne’?

If the book “Dirty Tobacco” which was written by a senior official within SARS at 1 point, is even only partly correct, then BAT is the absolute last company to be pointing any fingers. Their alleged circumventing of the law and tax evasion has been going on, on an industrial scale for years, in all the jurisdictions that they operate in. It seems to me that this sudden media campaign by them is nothing more than an attempt to stifle and remove smaller competitors.

I feel like i want to startup a cigarette manufacturing company.
Its brilliant – essential fast moving consumer item – (ticks all the boxes for a unicorn)

there’s no such thing as illicit trade – only Bat calls it that, coz they losing. (lol)

I completely agree with sensei.

Lokale gif issie lekker nie?

Highlighting the chasm between everyday administration of the socio-economic fruitree and the “black market economy”. Both spawn an excess in government day jobs and excise.

The once emergent moonlight manufacturers given a price support by government policy (aka covid support) and thereby uplifted to the mainstream.

Irresistible arbitrage opportunities ripening like low lying fruit and slipping into the lungs of the corruptible political plutocrat bosses. With the full support of their multinational industrialist masters.

Profiting from tax evasion at their own whim- declaring profit wherever in the World taxes are lowest (i.e. Caribbean/ Guernsey etc) and losses where they are not (SA et al).

Profiting from chemical drugs, addiction and ill health. A capitalist pipe dream of tyranny, corruption and greed. Pull the other… Internationale gif se $#%!!

Betting your mobile and motor car are made by “your approved multinational industrial master”?

Grow up comrade.

Exactly- all the more reason for a fair share of local content in non-technology items.

This Coca Cola economy has to develop beyond sin taxes for addicts on cigarette tobacco and alcohol fixes… Sub Saharan Africa has a host more value to add.

Can we see some development in gig economy infrastructure, open up our cities to digital nomads, uplift our arts and culture to the international stage, encourage transhumance and eco-tourism, boost upstream value to our abundant resources, support the tenants of green economics etc etc.

This would take the application of a large dose of imagination and intuition- child-like values to you perhaps?

Guess there is a reason the legal age to smoke is 16 and drink is 18… the losers / users a bunch of hopeless old fogies!

End of comments.

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