Almost 27% of all cigarettes sold in SA’s multibillion-rand tobacco industry are considered illicit – and they are being sold in three out of every four independent stores across the country.
With areas like Nelson Mandela Bay awash with illicit tobacco, the Eastern Cape is a significant market for the illegal trade, commanding 8.9% of SA’s total illicit cigarette sales.
Gauteng, by comparison, is the country’s largest illicit tobacco market, accounting for 14% of the total illicit trade.
These were among the shocking statistics revealed by the Tobacco Institute of Southern Africa and research house Ipsos on Thursday, when the role played by the cigarette trade in state capture was also raised.
Illicit cigarettes are defined by the tobacco industry as untaxed cigarettes.
In monetary terms, a packet of 20 cigarettes sold at less than R17.85 is potentially illicit, with R17.85 being the minimum tax payable a packet.
A recent Herald investigation into the trade showed that packs of 20 cigarettes retailing at as low as R6 and R7 are available at small, independent stores across the Bay area.
But with Sars’ tax payment processes for cigarettes operating on a “tax-at-source” basis – meaning taxes are meant to be applied “at the factory gate” – retailers are not being held accountable for losses in tax revenue from illicit tobacco.
The tobacco institute, which says cigarettes retail for as little as R5 in some areas, estimates tax revenue losses to be about R600m a month – a total of R7bn for this year alone.
In the latest initiative in its years-long battle against illegal tobacco, the institute – which represents the majority of tobacco companies operating in SA, along with tobacco farmers and other participants in the tobacco value chain – commissioned an independent investigation into the illicit trade.
Besides the loss of tax revenue, the illicit trade is also believed to have significant negative impacts on the country’s agricultural sector and tobacco industry as a whole, while putting legal cigarette brands at a major pricing disadvantage.
The release of the findings of Ipsos’s “National Study of the Illicit Tobacco Trade in South Africa” drew outrage from agricultural body Agri SA, which called on the government to “urgently respond to the shocking findings”.
A startling feature of the report is that it not only names, but provides figures for, the tobacco companies it alleges are participating in the illicit trade.
According to the report, brands from one company accounted for 75.1% of all sales below minimum tax owed on each sale.
Asked for a response to the allegations, a legal representative for the company rubbished the Ipsos report, claiming it was inaccurate and that the tobacco institute was heavily influenced by one of its large member companies.
“Our client contributes approximately R1.8bn every year to the fiscus by way of duties payable on its products; our client is a major contributor to the fiscus and, moreover, is locally owned,” the attorney said.
Addressing the media briefing, tobacco institute chair Francois van der Merwe spoke on the industry’s relationship with Sars and how Sars had allegedly dropped its investigations – code-named “Honeybadger” – after 2014.
“Illegal cigarettes costing as little as R5 a pack are now available for sale in more than 100,000 shops across SA, and more than one-third of cigarettes in ‘non-organised’ shops – which account for almost 80% of all tobacco sales – are being sold for well below the government’s R17.85 minimum in tax payable,” he said.
“The Ipsos study is the most robust scientific analysis of the multibillion-rand illegal cigarette market ever carried out in SA. It has been peer-reviewed and independently validated.
“It shows that the illegal market exploded since Sars ordered that investigations and the inspection of cigarette factories be stopped, under suspended commissioner Tom Moyane,” Van der Merwe said.