In 2022 alone, the government lost R15 billion in excise and R3 billion in VAT from these illicit sales. From 2002 to 2020, the revenue lost to the fiscus was a staggering R110 billion.
In 2005, British American Tobacco (BAT) was reckoned to have 91% of the local tobacco market. Other multinationals such as Philip Morris and Japan Tobacco International then entered the market, followed by smaller manufacturers such as Gold Leaf Tobacco, attracted by high profits being made by already established cancer merchants.
Many of the cigarettes produced by the new kids on the block started selling at prices that did not even cover the cost of the excise, and that practice continues to this day.
The 60% market share captured by illicit cigarettes corresponds with recent estimates by tobacco majors such as BAT and Philip Morris, with some suggesting the black market is as high as 70%. Put another way, legal cigarette sales on which taxes were paid accounted for about 14.3 billion sticks in 2022, against 19.4 billion illicit skywe.
An illicit pack of 20 cigarettes sell for anything from R15 to more than R50. The excise on the pack is R21.77, which means anything selling for less than about R32 is probably illegal, say the authors of the report, Nicole Vellios and Corné van Walbeek.
Nearly 30% of South African adults are smokers, and there is little doubt that the cheapness of cigarettes, flooded with black market products, is a key reason for the high smoking prevalence rate in SA. More people would have quit smoking or reduced their consumption if cigarette prices had been higher says the UCT study.
Given the massive size of the illicit market, an increase in the excise tax becomes much less potent as a tobacco control tool, say the authors.
“An increase in the excise tax will have an impact on the price of legal cigarettes, while the price of illicit cigarettes is unaffected (unless illicit cigarette manufacturers increase retail prices),” says the study.
Given the massive loss of revenue to Sars, what’s to be done?
The UCT study does offer some solutions: “Sars should secure the cigarette supply chain to monitor cigarettes from the point of production to the point of sale. The Protocol to Eliminate Illicit Trade in Tobacco Products provides guidelines for reducing illicit trade.
“South Africa has not yet ratified the Protocol. The Protocol commits governments to take effective steps to reduce the illicit trade in tobacco products, such as allowing only licensed manufacturers to produce cigarettes and implementing a track-and-trace system.
“If Sars does not secure the supply chain, South Africa will continue to lose valuable revenue.”
Although eventually fired in 2018 by President Cyril Ramaphosa, Tom’s legacy at SARS is still lingering like the stench of a cheap Chicago.
[source:moneyweb]
