Retailers assisting the black market for cigarettes – Study

A study commissioned by British American Tobacco SA (BAT) – said to be free of interference from BAT – suggests the cigarette market has been given over to black marketeers, with four out of five outlets surveyed in the Free State offering smokes at below the minimum collectible tax (MCT) of R21.61 for a pack of 20.

Any pack of 20 cigarettes selling below the MCT of R21.61 is deemed to be illicit. Some packs were selling for as little as R10 and even R6 – meaning no tax could have been paid on these cigarettes.

The study says this is a consequence of the government’s imposition of a ban on cigarette sales in the early part of the Covid lockdown last year (now lifted). The ban allowed a black market for cigarettes to flourish, with the fiscus losing R8 billion a year in excise revenue.

Illicit cigarette sales were most prevalent in the Free State, where 81% of outlets visited were selling below the MCT price level, against 70% of outlets visited in Gauteng and 71% in the Western Cape, according to the Ipsos study.

“That’s almost a 10% increase on the figures recorded only a month ago before the big hike in tobacco sin taxes,” says Yusuf Abramjee, founder of Tax Justice South Africa.

“It is shockingly clear that the excise increase, which was double the rate of inflation, has triggered a full-scale price war among tax-evading manufacturers, who’ve been gifted more customers and even bigger profit margins.

“The government lit a fire under the illicit cigarette trade with the five-month lockdown tobacco sales ban last year that handed the market to criminal operators.”

The government had unleashed this monster and has a duty to get it back in its cage, added Abramjee. Illegal cigarettes are known to be pouring across the border from Zimbabwe, Mozambique and even Zambia, where SA’s high excise rates of cigarettes provide a god-sent opportunity to black marketeers.

The Fair-trade Independent Tobacco Association (Fita), which represents smaller tobacco producers based in SA, is unconvinced by the study findings and Abramjee’s conclusions, which point to some of its clients as the main culprits.

According to Ipsos, cigarettes produced by Gold Leaf Tobacco Zimbabwe (not part of Fita), Carnilinx and Afroberg Tobacco were most frequently found to be selling below the MCT level. According to a July 2020 study by University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep), 93% of smokers were able to buy smokes on the black market.

The same study found that the market share by multinational tobacco companies (British American Tobacco, Philip Morris International, Japan Tobacco International and Imperial Tobacco) had collapsed from 74% to just 17%.

Says Fita chair Sinenhlanhla Mnguni: “These so-called independent reports are now also being used as ammunition by Big Tobacco for anti-competitive purposes to smear the names and brands of independent local cigarette manufacturers as a way to strong-arm retailers into removing the products of smaller independent manufacturers off their shelves. This is an attempt to maintain the status quo and to keep certain players in the informal trade in order to protect the profits of multinationals in an anti-competitive manner. This perpetuates the illusion that the brands of local cigarette manufacturers must be illicit, given that they can only be procured from informal traders and not in formal retail spaces.”

Tax Justice SA has called for a commission of inquiry into the collapsed tax revenues from cigarette sales due to black market activity, though Fita says this will not achieve anything other than wasting taxpayer money and time.

“Fita members are all compliant with the relevant laws of this country which govern the tobacco industry and have at all times been co-operative with Sars in as far as its efforts in implementing measures to curb non-compliance in the industry along its value chain such as that of installing production counters on the machines of our members.”

Gold Leaf Tobacco Company (GLTC) is a member of another industry body, SA Tobacco Organisation (Sato), which issued a statement in January that Gold Leaf was paying tax of R200 million a month.

“Our member’s market share, as researched by independent researchers, confirms that our member’s sales are in conformity with [their] tax contributions, thereby rubbishing all and any allegations concerning any illicit activity of GLTC,” said Sato.

Fita has turned the spotlight back at BAT, which was itself the subject of a report by Tax Justice Network in 2019 claiming it was shifting profits out of poorer countries to tax-friendlier jurisdictions.

Sato has called for all tobacco manufacturers, multinational and local, to open up their records for scrutiny by the public to determine where the tax leakage in the SA economy is occurring.