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South Africa – The illicit cigarette trade in South Africa is a pressing issue, costing the country billions in tax revenue each year. According to Professor Corne van Walbeek from the School of Economics, about 24% of adult South African smokers consume billions of cigarettes annually. Approximately 60% of these cigarettes, a staggering majority, are illicit, meaning that taxes on them are not paid, leading to significant tax losses.
“Like cigarettes, like alcohol and sugar-sweetened beverages in South Africa, are subject to an excise tax, an additional tax over and above the VAT rate. At the moment, that rate is R21.77 per pack of cigarettes, which should go to the government in the form of an excise tax.”
“For 60% of cigarettes consumed, that tax is not being collected, and the government is losing out. According to our best estimates, about R18 billion every year in the last three years has not been collected because of the illicit market in cigarettes.”
The illicit cigarette market has fluctuated significantly over the years, and the South African Revenue Service (SARS) has long been aware of this issue but has struggled to address it effectively. Despite efforts to curb the sales of illicit tobacco products, Professor van Walbeek believes that the sales ban on cigarettes and related products during the pandemic worsened the problem, further entrenching the illegal market.
“What that ban unfortunately did is entrench the illicit market. We saw that people were now buying pretty much any type of cigarette out of desperation. They weren’t necessarily buying their preferred brands and were buying pretty much anything.”
“Many of those people then stayed with these illicit brands even after the ban was lifted in August 2020. We had this massive spike in illicit trade during this period, and it remained at that very high and elevated level.”
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Where Are These Illegal and Illicit Cigarettes Coming From?
Professor van Walbeek emphasises that much illicit trade involves undeclared local production rather than the commonly believed smuggling through the country’s borders.
To address these undeclared cigarettes from manufacturers, van Walbeek notes that SARS planned to implement measures such as installing CCTV cameras in manufacturing plants to monitor production and ensure the declared values match the actual output. However, a recent court case has delayed this initiative, which SARS is now appealing.
“I think by implementing, for instance, the CCTV cameras in the various pack houses and the various manufacturing plants, that makes a whole lot of sense.”
“Unfortunately, the court case has gone against them, and the Revenue Services is currently appealing that court case with the hope that they will be able to implement these cameras.”
How can the government combat illicit sales? Professor van Walbeek suggests that the government should ratify the protocol to eliminate illegal trade in tobacco products. This would involve committing to strategies such as securing supply chains through various licensing measures and implementing track and trace systems to monitor the movement of cigarette packs from production to sales.
“South Africa is part of an international treaty called the Framework Convention on Tobacco Control, run by the World Health Organization. More than 180 countries are members, including South Africa.”
“At this point, between 60 and 70 countries have already ratified it. South Africa has signed the treaty but hasn’t ratified it, meaning it hasn’t made it applicable to the country.”
