The South African taxman is allegedly being robbed of an estimated R7-billion annually through the illicit sale of cigarettes.
This is according to a new report compiled by the research think-tank Ipsos‚ released on Thursday at the Johannesburg Stock Exchange.
The research‚ compiled for the Tobacco Industry of SA (Tisa)‚ is the first of its kind to look into the country’s illicit cigarette trade.
The report reveals how legitimate local cigarette companies are allegedly underdeclaring the number of cigarettes they manufacture to Sars. These are then sold off to street hawkers‚ spaza shops‚ general dealers and corner cafes‚ allegedly earning manufacturers billions of rands in undeclared revenue — and the taxman nothing.
The study also shows that at least 8‚000 jobs are at risk from the sale of illicit cigarettes‚ with tax-compliant companies at risk of closing because of the trade.
An estimated 30-billion individual cigarettes are sold annually in South Africa‚ which has 7-million adults who collectively smoke a million packs of cigarette every day‚ according to Tisa.
Tisa‚ which represents international tobacco companies including British American Tobacco and Japan Tobacco International‚ is calling for a ban on cigarettes being sold below the minimum tax payable.
The report describes illicit cigarettes as those priced below the minimum tax payable: R17.85 per pack or below R1 for a loose cigarette.
There is currently no law stating at what price cigarettes can be sold‚ Tisa said.
The report‚ which lists the manufacturers allegedly dodging taxes‚ states collectively over the past three years companies behind the illicit manufacturing of cigarettes have earned R15-billion through such sales.
Ipsos say they did not interview the companies as the research was market-based and only looked at where‚ what kind and for how much different brands were sold. The research excluded cigarettes sold in taverns and shebeens.
Zibusiso Ngulube from Ipsos said researchers travelled the country and visited about 135‚000 spaza shops‚ hawkers and general dealers selling cigarettes.
Ngulube said they discovered three out of every four shops in the non-organised trade industry (spaza shops‚ corner cafes and general dealers) sold illicit cigarettes. “That equates to more than 100‚000 shops selling illicit cigarettes.”
He said the illicit trade within the non-organised market accounted for at least 33% of the total market‚ with non-organised businesses accounting for nearly 80% of all tobacco sales in South Africa.
The Western Cape‚ Gauteng‚ Eastern Cape and North West are the country’s hotspots when it comes to the sale of ultra-cheap cigarettes‚ with some brands selling for as little as R5 a pack.
“We always knew there was a problem‚ but we never thought it would be this big — especially the extent of the involvement of one large player in the illicit trade‚” he said.
Ngulube said this one company in particular was responsible for 75% of the illicit trade‚ manufactured “in a factory licensed by Sars“.
He said two other illicit cigarette brands controlled 6.3% and 3.6% of the illicit market respectively.
’Difficult for retailers to compete’
Ngulube said companies selling ultra-cheap cigarettes had made deep inroads into the non-organised market and developed a highly efficient distribution and marketing system.
“Our research found brands selling for as low as R5 per pack. The price gap between the average price of illicit brands to the most popular legal brand is approximately R26.
“Independent superettes‚ corner cafes and general dealers are the key channels for ultra-cheap brands‚ with hawkers providing a key entry point‚ mainly through the loose cigarette sales. These manufacturers are perfectly primed to continue to grow at a fast rate.
“It has become very difficult for retailers to compete if they do not stock these brands‚ given their ultra-low prices.”
Tisa CEO Francois van der Merwe said the research showed those behind these sales were well-established corporates. He said the transgressions were not committed by the cigarette sellers themselves‚ “but rather by the manufacturers‚ who underdeclare what they manufacture.
“They all pay tax‚ but way below what they should be paying‚” he said‚ adding that they were putting pressure on Sars for its failure to clamp down on illicit cigarette trade.
Van der Merwe said the illicit sale of cigarettes had reached epidemic proportions‚ with Sars losing out on R7-billion in revenue annually.
“The implication is that legitimate manufacturers’ production volumes have dropped by 15% since 2016. If the situation continues‚ legitimate manufacturers will soon have to shut shop.”
Van der Merwe said the research would be shared with Sars‚ the Hawks and parliament’s finance portfolio committee.
“Government needs to help protect the industry. Because illicit cigarettes are manufactured in factories licensed by Sars‚ customs officials should be placed in all cigarette production plants to monitor production and declarations to Sars‚” he said.
“We are calling for a ban on sales below the level of tax owed‚” he added. “Such a ban would allow law enforcement to easily remove illicit products from the market.”