Today’s tobacco ban could encourage a culture of tomorrow’s tax avoidance

The headline of an open letter addressed to President Cyril Ramaphosa and cabinet ministers, published over the weekend in Sunday papers, says that in 100 days, 11 million “law-abiding South Africans” have been turned into criminals.

It continues: “Today marks 100 days since you first banned the sale of tobacco and vaping products. SA has been bleeding ever since while criminals in the illegal trade have reaped the rewards.”

A bit further, the letter penned by industry stakeholders and retailers mentions that the “national purse has been denied R3.5 billion in excise duties already” at a time when every last cent is desperately needed.

Whether you burn through a pack a day or hate smoking, anybody would agree that R3.5 billion in lost taxes is a fortune the state can ill afford to lose.

The letter, published over two pages in Sunday newspapers, puts the lost revenue into perspective. It says the R3.5 billion could have funded two new hospitals and 5 000 ventilators. Or paid the salaries of 25 000 nurses, 5 000 doctors and 20 000 primary school teachers. Or bought 23 million food parcels, roughly enough to sustain all the poor in SA for a week. Or it could have been used to build 54 new schools.

SA’s problems in perspective

Whether somebody who has been smoking for 20 years is more likely to die from Covid-19 if they smoke another packet tomorrow seems unimportant when considering the immediate problems suddenly facing millions of people in SA.

Most of the articles in the Sunday newspapers lamented the dire shortage of hospital beds and the suffering of the poor due to the economic effects of the coronavirus pandemic. One of the most shocking statistics is the fact that hundreds of schools in SA don’t have running water for pupils to wash their hands, and that government is seemingly incapable of implementing a simple low-tech solution such as installing water tanks under a roof gutter.

The open letter was signed and the advertisement paid for by stakeholders in the tobacco industry, including British American Tobacco, the SA Tobacco Transformation Alliance, Limpopo Tobacco Processors and the Black Tobacco Farmers Association, supported by retailers such as Spar, Fresh Stop, JJ Cale Tobacconists and the SA Informal Traders Alliance.

Also read: Tobacco wars: behind the scenes of Batsa’s urgent court application

The advertisements came after the government denied the tobacco industry the opportunity to address their grievances in court by requesting more time to study court documents, a standard request in cases that the courts hardly ever deny.

A recent Moneyweb article indicates that government, having been through British American Tobacco’s replying affidavit, needs the extra time now that it knows what it’s up against – and just how much evidence it will need to present to back up its decision to implement the ban.

Sunday’s letter delivers hard punches. From the “you” in the opening sentence that Sunday marked “100 days since you first banned the sale of tobacco” to the allegation that: “With the stroke of a pen, 11 million previously law-abiding smokers and vapers have been tuned into criminals.”

“Petty criminals who must [now] deal with hardened criminals every day,” say the authors.

“Money that is meant to help build a better nation for all has instead filled the pockets of these billionaire criminals in the illegal trade. Their corrupt enterprises have thrived beyond their wildest dreams while honest, hard-working citizens have had their hopes crushed,” reads the letter.

The tobacco industry says the tobacco fields of Limpopo, the spaza shops in townships, factory workers, truck drivers and store staff feel the “pain” and are being denied the ability to put bread on the table, shoes on the feet of their children, schoolbooks in their bags and a safe roof over their heads.

“We humbly request that you put an end to this painful prohibition,” the letter pleads right at the end.

Also read: Mboweni ‘didn’t like ban on alcohol, cigarette sales’, but ‘lost the debate’

It might be too late …

British American Tobacco and its friends might be wasting their time as well as their money in paying for very expensive full-page advertisements.

Indications are that the illegal tobacco industry has used the virus pandemic and lockdown to expand and firmly establish an efficient distribution network.

The clue to this is that cigarettes are now freely available and prices have fallen dramatically during the last few weeks, indicating that there is an adequate supply.

The prices of cheaper brands have decreased from between R100 and R150 per packet to around R50 per packet.

Asking 10 or so smokers where they get their cigarettes can hardly be classified as robust research, but the results are nevertheless illuminating. Cigarettes, most agree, are readily available from smaller independent shops.

Corner shops in suburbs, spaza shops in townships and individuals on street corners are selling cigarettes without bothering to hide their trade much.

Savannah, manufactured by Gold Leaf Tobacco, has seemingly grown into a firm favourite in the absence of those brands that were traditionally considered decent cigarettes such as Peter Stuyvesant and Camel.

Gold Leaf Tobacco has for years been accused of selling cigarettes without paying the full excise and custom duties, with primarily British American Tobacco alleging that some Gold Leaf Tobacco brands are illicit cigarettes, due to the fact that several of them are selling at prices less than the tax payable on a packet of 20 cigarettes. Gold Leaf always denies these allegations.

If anything, the ban on selling tobacco during the more than three months of lockdown should show authorities which brands are leaking out of which cigarette factories.

Also read: Ban on cigarette sales ‘to cost govt over R1bn a month’

Sin taxes are heavy to begin with

But it might be too late to stop the illegal trade. With sin taxes on cigarettes north of R12 per packet, the motivation to bypass tax is huge.

Cigarette smugglers have been running circles around authorities for years, including the South African Revenue Service (Sars), the police and whatever health departments oppose smoking. The strengthening of illicit distribution networks during the tobacco ban will make this even more difficult.

The R3.5 billion in excise duties referred to in the open letter is lost forever and losses will continue in future, while the government will look at tobacco companies’ published production figures and congratulate itself on its success in curbing cigarette sales.

In addition, the actual losses to the fiscus far exceed the R3.5 billion in excise duties. It goes without saying that those in the illegal supply chain – from the manufacturers and smugglers to the small shops selling the contraband and the go-betweens selling them on from there – won’t pay tax on their profits or deduct income tax from their employees.

Efforts to curb the spread of the coronavirus have had the unforeseen consequence of driving many businesses into the informal sector, the most obvious examples being hairdressers and beauticians.

Even once restrictions are lifted, many are likely to opt to stay in the informal sector and avoid the rent for big premises, the salaries for supporting staff, and tax obligations associated with being a formal enterprise.

The informal cigarette distribution network is probably here to stay.

It is bigger than before, and it can expand into other products – like alcohol, which is also highly taxed.

This article first appeared on Moneyweb and has been republished with permission.

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