Tobacco industry challenges Sars over new surveillance rule

Tobacco manufacturers are taking the South African Revenue Service (Sars) to court to stop it implementing a new rule requiring them to install CCTV equipment in their warehouses as a way to monitor production and rein in galloping tax leakage, which is reckoned to cost the fiscus upwards of R20 billion a year.

The Fair-Trade Independent Tobacco Association (Fita), representing several smaller tobacco producers, is asking the Pretoria High Court to interdict Sars from implementing the new warehouse camera rule on the grounds that it violates the constitutional right to privacy.

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It then wants the court to review and set aside the rule amendments.

The new camera rule was introduced under the Customs and Excise Act in 2022, compelling any warehouse used for manufacturing or storing tobacco products to be placed under “constant, continuous and permanent surveillance” via CCTV.

The rule requires constant surveillance of manufacturer and imported tobacco products, and must provide coverage of all manufacturing, packaging, despatch and loading areas.

Failure to comply with the new rules could result in Sars cancelling licences issued under the Customs and Excise Act, fines or imprisonment.

“The new rules are an unprecedented governmental intervention and a grave, unjustified violation of the right to privacy and property,” argues Fita in its court application.

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It says this is the first time to its knowledge that Sars has required a taxpayer to be placed under constant, 24/7 surveillance.

‘Irrational, capricious, arbitrary’

It goes on to say that the CCTV requirement is irrational, capricious and arbitrary, is clearly against the law and violates constitutional rights to privacy and arbitrary deprivation of property.

Fita wants the new rules reviewed and set aside under the Promotion of Access to Justice Act.

Granting Sars the right to cancel a licence for non-compliance under the new rules amounts to arbitrary deprivation of property, it says.

Members of Fita include Best Tobacco Company, Carnilinx, Folha Manufacturers, Home of Cut Rag and Protobac.

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The new rules require Sars agents to be given access to warehouses and production facilities to inspect, repair or replace CCTV equipment and footage.

Fita is asking the court to compel Sars to furnish it with the documents and rationale leading up to the rule amendment – which Sars says has already been provided.

A ‘necessary move’ says Sars

Sars is opposing the Fita application, saying 24-hour surveillance is necessary to deter the illicit trade in tobacco product which has resulted in rampant tax evasion in the industry.

“The illicit trade in tobacco products, especially cigarettes, is a major and growing problem worldwide,” deposes Anna van Twisk of Sars’s legislative policy for customs and excise unit.

“Compliance audits at customs and excise manufacturing warehouses are dependent [on] documentation and information given to Sars by licensees of these warehouses.

“The system of self-regulation requires licensees to keep records of the number of cigarette sticks produced on a daily basis,” says Van Twisk.

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“However, Sars experiences difficulty with verifying the integrity of the values presented on the documentation and information provided.”

The new rules conform with practices elsewhere in the world, and with SA’s international obligations under the World Health Organisation Framework Convention on Tobacco Control.

Fita says this type of surveillance is used only in one or two authoritarian states.

More moves planned

These new rules are part of a package of amendments Sars intends to introduce to curb the illicit trade in tobacco products.

Fita responds that there is no provision in the Customs and Excise Act empowering Sars to make rules that subject licensees to constant and continuous surveillance.

What the new rules will do, says Fita, is authorise the Sars commissioner to legislate, when the law only allows him to regulate.

“Introducing a wholly new character of inspection and search – from temporary and time-to-time visits based upon a reasonable suspicion of non-compliance to a new regime of constant, continuous and permanent surveillance – is not to regulate but to legislate.”

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Nothing in the Customs and Excise Act allows for surveillance of licensed premises, as opposed to periodic regulatory inspections.

Fita argues that the act does not give the commissioner the power to create crimes as these new rules attempt to do, with penalties such as imprisonment or fines for non-compliance. Only parliament can ‘create crimes’.

Industry ‘singled out’

Fita chair Sinen Mnguni tells Moneyweb his members are as concerned as anyone about the tax leakage in the illicit trade, but object to tobacco manufacturers being singled out for this kind of intrusive surveillance, while other sectors known for tax evasion – such as clothing, gold and fuel – are not.

“We have recommended introducing technologies such as track and trace [of cigarette boxes] that would assist Sars in combatting the illegal trade,” says Mnguni.

“Sars was considering employing this technology but abandoned it for unknown reasons. Our position is that we cannot allow the constitution to be bypassed when there are better solutions available.

“We also don’t believe 24/7 surveillance is going to be effective while illegal cigarettes continue to pour across the border,” he adds.

“Sars has many other remedies at its disposal such as the stationing of permanent officials at our member factories, the installation of production counters on our machinery, all of which we have never objected to.”

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There’s also concern that intellectual property may be compromised by allowing Sars cameras into factories.

The case to interdict Sars from implementing the new rules will be heard on 15 April 2024, while the application to review and set aside the new rules will be heard later this year.

This article was republished from Moneyweb. Read the original here