Trade in illicit cigarettes hits tax revenue

Tisa's Francois van der Merwe says something must be done to curb illegal sales of cigarettes. Image:Farmers Weekly

For the established industry this illegal market means a loss of revenue amounting to billions of rand each year. For the fiscus it means a loss of tax revenue estimated at R18bn since 2010.

Pinpointing the illegal producers is not that easy as, according to the Tobacco Institute of Southern Africa (Tisa), they appear to be legitimate but declare only some of their production for tax purposes. The remainder is kept out of sight to avoid having to pay excise tax, which is R11.60 for a packet of 20 cigarettes.

In addition to the illegal domestic local production, about 38% of illicit cigarettes smoked in SA each year are imported, with Zimbabwe being a major source.

Tisa estimates that about 30% of total annual cigarette consumption in SA either enters the country illegally or is produced without being declared. This is about 8bn cigarettes a year of the 30bn cigarettes consumed annually.

"The biggest threat to the sustainability of the legal sector is this illicit trade," said Tisa's Chief Executive Francois van der Merwe.

Cheap illegal cigarettes

Whereas a legitimate packet of 20 cigarettes costs about R30, most illegal ones sell for R10 or less, which, contrary to the government's health strategies, encourages people to smoke. Van der Merwe estimated that the minimum price that a packet could be sold for if taxes were paid and with minimum profit was R16.50. Anything below this would immediately be suspect.

Government, parliamentary and industry representatives met for a round-table discussion led by Deputy International Relations and Co-operation Minister Marius Fransman, to devise ways to address the problem. Also present were representatives from three African embassies, the Consumer Goods Council and the South African Revenue Service (SARS).

Parliament's police portfolio committee Chairman, Annelize van Wyk, said gaps in the law would be addressed and progress evaluated in six months' time. "There has to be a review of legislation to resolve illicit trading," she said.

One possibility would be the forfeiture of assets of those found guilty of illegally producing cigarettes.

SARS has indicated it will scrutinise the industry from one end of the value chain to the other in a bid to root out tax evaders.

Department of Trade and Industry Commercial Law and Policy Division Head Desmond Ramabulana said that the proposed Licensing of Businesses Bill would also act as a mechanism to control illicit traders as it would require all businesses, formal and informal, to obtain licences from their municipalities.

The initial draft of the law caused an outcry because of its perceived imposition of red tape, so it was withdrawn by Trade and Industry Minister Rob Davies, who established a task team to deal with it.

Ramabulana said consultation had taken place with informal traders throughout the country and the department was drawing up a report on the proposals for the minister.