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

Minister of Cooperative Governance and Traditional Affairs Nkosazana Dlamini-Zuma. Photo: File

Meanwhile, Sars’ tobacco tax revenues continue to go up in smoke.

The urgent application brought by British American Tobacco South Africa (Batsa) to have the ban on the sale of tobacco products set aside has been delayed by President Cyril Ramaphosa and Minister of Cooperative Governance and Traditional Affairs (Cogta) Dr Nkosazana Dlamini-Zuma for some six weeks because of “scheduling complications”.

Perhaps the president and the minister lost their eagerness to be heard in court when they received Batsa’s replying affidavit and realised what they were up against.

After all, they would be required to come up with evidence to support all aspects of the tobacco ban, including how decisions were made.

It is questionable whether they had even gone through Batsa’s founding affidavit and the some 500 accompanying pages of documents that were submitted on May 20.

Inexplicable

Batsa has described the decision to delay this urgent application to lift the tobacco sales ban as “inexplicable” and “worrying”.

Taxpayers should also be concerned, as they will be required to cough up the difference.

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But perhaps the most concerned should be the Government Employees Pension Fund (GEPF) members, as they are the ultimate passive sitting ducks.

As for the South African Revenue Service (Sars), it is going deeper into the red, and it’s unlikely it will be receiving any taxes from the illicit tobacco dealers. Sars, unsurprisingly, declined to comment as: “The matter you are enquiring about is before the court … ”

Batsa claims that this six-week delay will cost South Africa more than R1.4 billion in excise taxes alone, and thousands of jobs.

“This delaying of justice and a resolution of this issue is inexplicable. By the time the case is heard the ban will have been in place for four and half months during which time billions of illegal cigarettes will have been sold,” said Johnny Moloto of Batsa.

The applicants in Batsa’s matter (the application) cover the entire value chain for tobacco and vaping products, including agricultural, manufacturing, retail and consumer sectors. This application is also made in the interests of a group of persons who are not in a position to litigate in their own interests (per section 38(c) of the Constitution), as well as in the public interest (per section 38(e) of the Constitution).

The purpose of the application is to set aside Regulation 45, which prohibits the sale of tobacco and vaping products during Alert Level 3 as it violates a series of fundamental rights, and is thus unconstitutional. Further, the regulation is irregular in terms of the principles of administrative law.

Even vaping products that do not contain tobacco are restricted in the same way as tobacco products.

Timeline marked by no response, no reply

Prior to the commencement of lockdown on March 26, the Department of Trade Industry and Competition (DTIC) announced that a limited range of goods would be available for sale during the lockdown period. Batsa wrote to the Minister of Small Development and the Minister of Finance on March 24 requesting that tobacco products be included in the list of basic goods that can be manufactured and sold during the lockdown. Batsa also wrote to the DTIC on March 25 following the publication of the amended regulations. No replies were received to these letters.

There were divergent opinions between the Western Cape Provincial Government and DTIC on whether tobacco products could be sold. On April 23, the president addressed the nation to give an update on the government’s response to the Covid-19 pandemic. He announced that cigarettes could be sold from May 1, “when the country moves to Level 4 … ”

A draft framework for all five alert levels, called The Risk Adjusted Strategy was published on April 20. Alert Level 4 included tobacco products as goods that could be sold.

The Risk Adjusted Strategy called for public comment.

Hence, Batsa submitted a written representations expressing gratitude that tobacco products could be sold, and added that Alert Level 4 would allow the harvesting, processing, manufacturing and sale of tobacco products, and also cited a range of factors to support the lifting of the prohibition. Batsa also commented that there was insufficient evidence on the impact of smoking and vaping on Covid-19. No reply was received.

Meanwhile, Batsa’s operations immediately went into action, and between April 29 and May 4, orders to the value of R293 million were captured.

“In an extremely volte-face”, the minister announced on April 29 that the prohibition of the sale of tobacco and vaping products would continue.

In an attempt to embark on an engagement process, Batsa addressed further submissions to the president. No reply was received.

Batsa CEO Andre Joubert, in the founding affidavit: “The continued prohibition on the sale of tobacco and vaping products causes harm not only to individual consumers, but also to Batsa, the tobacco industry and the fiscus.”

Arguments and evidence to be led in court

These include:

Evidence on the impact on consumers:

  • An affidavit deposed by Dr Chris Proctor on the harm caused by the prohibition to the emotional well-being on consumers of tobacco and other products. Countries such as Italy, France, Switzerland and Spain have classified outlets that sell tobacco products as essential during lockdown.
  • A research report compiled by an independent research body, which estimates that 90% of smokers will continue to purchase cigarettes during lockdown.

The impact on the tobacco industry:

  • There are over 200 commercial tobacco farmers, and 150 emerging tobacco farmers in South Africa. These farmers provide approximately 8 000 jobs. The dependents are estimated to number more than 30 000, primarily in rural areas. Tobacco farmers are also excluded from the R1.2 billion disaster fund made available to assist South African farmers.
  • Batsa’s total revenue loss exceeds R2 billion in a nine-week period.

Regulation 45 is unconstitutional and amounts to an arbitrary deprivation of property:

  • It is an unjustifiable limitation on the rights of farmers and tobacconists to choose their trade, it constitutes an arbitrary deprivation of the property rights of participants in the tobacco and vaping supply chain, and it amounts to an unconstitutional infringement of the rights of consumers.
  • The recently harvested tobacco crop will go to waste, while tobacco farms, manufacturers and wholesalers cannot make productive use of their facilities.
  • Section 22 of the Constitution protects one’s right to choose and practice a trade, occupation and profession.

Administrative action:

  • The making of regulations constitutes “administrative action” within the meaning of the Promotion of Administrative Justice Act (Paja). It must also comply with the principles of legality.
  • The minister will have to show that, in making the regulations, she complied with Section 27(2) of the Disaster Management Act; that the minister has the power to make regulations “after consulting with the responsible cabinet member”. For example, does a collective decision of the National Coronavirus Command Council (NCCC) fall within the ambit of this section, or did the minister unlawfully abdicate to the NCCC a power that is vested in her?

Section 27 of the act:

  • This section provides that the minister may make regulations regarding the “sale, dispensing or transportation of alcoholic beverages in the disaster stricken or threatened area”, but not of other goods, such as tobacco or vaping products.
  • “Prohibiting the sale of those products must be rational, reasonable and not motivated by unlawful purpose, whether in terms of Paja or in terms of the principle of legality.”

Regulation 45 inflicts harm on consumers and on participants in the tobacco/vaping supply chain:

  • Is this harm necessary to avoid a greater harm that would occur if tobacco and vaping products were to be sold?
  • The minister had concern about the sharing of cigarettes; however, illicit cigarettes will continue to be shared.
  • Even if smoking increases the risk of contracting Covid-19 or exacerbates the severity of the disease (which Batsa does not accept), any adverse consequences of smoking would not be reversed by not smoking during the lockdown.
  • The minister should have given Batsa and other interested parties an opportunity to comment on the scientific studies that she relied on.

Procedural fairness:

  • The tobacco industry and the consumers of tobacco and vaping products have never been invited to comment, or to make submissions, notwithstanding the fact that the only items that cannot be sold under Alert Level 3 are tobacco and vaping products.
  • As a comparison, the liquor industry was given an opportunity to engage.

Various scientific studies and research papers have been submitted on the relationship between smoking and Covid-19.

Loss of tax revenue

The total loss of revenue of all the parties involved in the tobacco industry (farmers, manufacturers, wholesalers, suppliers, commission earners, employees), and hence, the loss in tax revenue, is incalculable.

For Batsa alone, every week of no sales results in approximately R350 million of revenue lost. Batsa estimates that in relation to Batsa alone, Sars would lose Vat of about R50 million per week, and excise duty losses of about R214 million per week.

The illicit cigarette trade is booming, and it will be difficult to stamp this out. It is to be noted that Sars recently discontinued the tender process for the track and trace system.

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

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