Illegal cigarettes cost Sars R5bn in lost taxes per year

Adriaan Kruger

A small change in the Tobacco Products Control Act will give the taxman the authority to collect an additional R5 billion per year in excise duty and solve the problem of trade in illicit cigarettes.

All that is necessary to stop the sale of counterfeit and illegal tobacco products is to change the law to set a minimum retail price equal to the tax payable on every packet of cigarettes.

This will effectively put crooked cigarette manufacturers, who rely on not paying due taxes on tobacco products to make huge profits, out of business. As from March 2018, the excise duty and VAT on the excise duty in itself amounts to R17.85 per packet of 20 cigarettes.

Any manufacturer that sells cigarettes for less than that probably has no intention of paying tax. And the oversight in the law allows them to sell their cheap cigarettes brazenly throughout South Africa.

A visit to almost any small shop, and sometimes the franchised outlets of larger retail chains, will show how widespread the marketing of illicit cigarettes has become. And how profitable it can be. The cheapest legal brands sell for around R23 per packet, which leaves about R5 after excise duty and VAT to be split between the retailer, manufacturer and distributors.

Then there are the packets of Rainbow Gold, JFK, M’s, Pacific Blue, RG, Navara, Westleigh, Ceasar, Bastille and several others that sell for between R6.20 and R10 per packet. It is highly unlikely that the manufacturers paid the required taxes as every sale will result in a loss of around R7 to R12 per packet. The income to these suspect producers amounts to at least twice that earned by honest manufacturers.

But according to the law, small retailers are doing nothing wrong by selling these cheap cigarettes, as all taxes are supposed to be paid by the manufacturer at the factory gate. Manufacturers of cheap cigarette brands maintain that tax is paid on their whole production and that they use their expensive brands to subsidise the cheaper ones.

The Tobacco Institute of SA (Tisa), an industry body that represents the legal tobacco industry in SA, together with a host of involved parties, briefed parliament a few weeks ago on the problem of illegal tobacco products.

“One of the things we asked for is for government to consider a minimum price for a packet of cigarettes,” Francois van der Merwe, chairman of Tiso, told Moneyweb. “That will give law enforcement agencies the authority to raid retailers and confiscate illicit cigarettes. This will, in time, destroy illicit trade.”

The submission to Parliament’s Standing Committee on Finance also asked government to immediately deploy inspectors to factories to monitor the input of production material such as cigarette paper, filters, tobacco and packaging material and compare it to the declared output. This will ensure that all the tax is paid.

“About 25% of all cigarettes sold in SA are illicit. In certain outlets, between 50% to 100% of cigarettes sold are illicit products.

“More than 90% of all illicit cigarettes sold in SA are manufactured locally. Tax is avoided by manipulation of production figures,” Tisa says in its presentation to parliament.

“It is an easy tax to collect,” says Van der Merwe. “There are only a handful of cigarette manufacturers and a few inspectors can ensure compliance to the law.”

The loss in tax to Treasury is huge. The legal tobacco industry maintains that government lost more than R27 billion in tax revenue between 2010 and 2016. According to estimates, tax avoidance from the sale of illicit cigarettes has increased from around R4 billion per annum in 2015 to more than R5 billion in 2017.

In addition, the illicit trade in tobacco makes a mockery of laws aimed at reducing tobacco consumption and improving the health of people. High taxes are designed to reduce demand and consumption by making cigarettes more expensive.

There are also concerns about quality control in illegal and illicit cigarette plants that could result in even more harmful tobacco products due to unknown chemical additives. In many cases, the tar and nicotine figures on the packs are understated, says Van der Merwe.

“Various forms of licensing already exist, but the challenge lies in enforcement. We need to see investigation of illicit manufacturers and revocation of manufacturing licences where they are found to have contravened the law.”

It is also fair that smokers contribute to government’s coffers and help to cover some of their future medical expenses.

The recent presentation to Parliament included representatives of the National Prosecuting Authority, the Directorate of Priority Crime Investigations (the Hawks) and Sars. It is possible that the recent steps to clean up Sars will result in decisive action against tobacco gangsters. A few small changes in the law and a little bit of political will can make it all possible.

Brought to you by Moneyweb