The South African Revenue Service’s plans to beef up its unit tackling illicit cigarettes are taking shape, but the improved unit will face challenges when they try to rein in abuse because the trade has been allowed to flourish in recent years.
The income that Sars has collected from declared cigarette tax has dropped by 20% over the past two years, despite statistics that show that South Africans’ cigarette consumption has not decreased.
In addition, investigative media reports have linked several high-profile politicians to the trade, and Sars’s conduct has itself been put under scrutiny. Jacques Pauw’s exposé The President’s Keepers has shown how closely interlinked the issues of state capture, the Zumas and the illicit tobacco trade were, and the Economic Freedom Fighters’ links with tobacco company Carnilinx have also been questioned in recent weeks.
Meanwhile, South Africa’s poorest citizens, hooked on cheap cigarettes, have been the biggest victims of the country’s rampant cigarette smuggling rings.
Acting Sars commissioner Mark Kingon said last week that re-establishing an investigating unit to clamp down on illicit cigarettes has been made a priority.
“We are working in all haste to ensure it is done,” he said at a media briefing. “Illicit trade continues to be a serious issue in our country.”
Kingon’s comments come after a month of parliamentary hearings into the illicit tobacco trade, which revealed how it had spiralled out of control after an investigative unit dedicated to the scourge became a victim of the internal wars that have plagued Sars.
When Sars briefed Parliament’s standing committee on finance in May, its group executive for customs compliance risk and case selection, William Mpye, acknowledged that South Africa’s tax revenue service had not done enough in the past two to three years.
Treasury officials told the committee that an increase in illicit trade in tobacco products not only affected the fiscus with lost excise tax revenue, but also hampered the government’s regulatory mandate as well as national public health policies.
Political meddling rears head
The treasury’s director of personal income taxes and saving, Chris Axelson, said the treasury had collected 26% less tax from cigarettes than anticipated.
He told Parliament that this was partly because large manufacturers have left South Africa, but also because at least R3‑billion was still outstanding when imported cigarettes were factored in.
“This appears to be due to increases in illicit trade,” he said.
Treasury officials recommended a probe into whether the increase in the country’s illicit tobacco trade was a result of declining resources, particularly a lack of intelligence capacity at Sars.
The treasury said this, and allegations of powerful figures with close links to illicit tobacco, should be probed by a commission of inquiry.
The downward slide appears to have started when Tom Moyane was appointed as Sars commissioner in September 2014.
He immediately set about disbanding specialist enforcement units, using allegations of abuse as a basis for doing so. Moyane is currently suspended.
In 2013, Sars established Project Honey Badger to investigate South Africa’s illicit tobacco trade. But the operation became a casualty of the so-called rogue unit scandal.
As part of his crackdown, Moyane shut down the specialised unit. As a result, there was an exodus of expertise and capacity to tackle the illicit cigarette trade, as employees found greener pastures elsewhere.
The Tobacco Institute of Southern Africa (Tisa) told Parliament’s finance committee that, as a result of the shutdown, it seemed that Sars folded its arms and did nothing to curb the illicit cigarette trade between 2014 and last year.
Although Sars customs investigations executive Patrick Moeng denied in Parliament that Project Honey Badger had been abandoned, Tisa’s Francois van der Merwe said he believed the opposite.
Sars team to stage a comeback
Fabian Murray, the acting chief officer for business and individual tax at Sars, said last month that the revenue service currently had one dedicated unit to focus on the tobacco industry: the integrated audit tobacco team.
He explained that this team had eight permanent and nine temporary members. Project expenditure, excluding staff costs, was R1.2‑million for 2014-2015, rising to R2.2‑million for 2015-2016 and R2.8‑million for 2016-2017, before dropping to R1‑million for 2017-2018.
He added that Sars wanted to re-establish teams to focus on illicit activities.
The National Prosecuting Authority’s acting special director of public prosecutions, Marlini Govender, said she believed that South Africa was now among the top five countries in the world that were trading in illicit cigarettes.
Tisa’s Van der Merwe told Parliament that at least a quarter of the South African cigarette market was illicit, adding that the loss to the fiscus in unpaid taxes on tobacco products from 2010 to 2016 was estimated to be about R27‑billion.
The Economics of Tobacco Control Project (ETCP) at the University of Cape Town found in a study that far less tax on tobacco products had been paid in the past three years — from R13‑billion in the 2015-2016 fiscal year to R12.1‑billion in 2016-2017 and R10.9‑billion in 2017-2018 — and that the illicit cigarette market had boomed.
The project tracks data to monitor cigarette sales and consumption in South Africa, and conducts surveys about usage. Its statistics show that illicit cigarettes, which are sold at low prices, make it easier for poor people to start smoking and then afford to keep going with the habit.
Project head Professor Corné van Walbeek said the figures showed that there had been a 16% drop over the past three years in cigarette tax paid.
Excise tax for a pack of cigarettes rose from R12.42 to R14.30 between 2015-2016 and 2017-2018. The total number of cigarette packs on which tax was paid fell by 27%, from 1.05‑billion to 763-million, Van Walbeek’s figures showed.
“Such a rapid decrease in consumption over this short period cannot be explained by changes in people’s smoking patterns alone. Instead, it points to a large increase in the illicit cigarette market,” he said.
The ETCP’s research found that the illicit trade was thriving in the country’s poorest communities.
Surveys in informal settlements indicate that the underground market is thriving.
In many places, cigarettes sell at 50c a stick or R10 a pack. As the excise tax alone for a pack is R15.52, it is clear that this tax has not been paid in such cases, he said.
Van Walbeek described South Africa’s cigarette market as “very fragmented and near-chaotic”, and that this illegal trade served to increase the health risks for some of South Africa’s most vulnerable citizens.
E-cigarettes light up the future
As the government grapples with the legislative issues around smoking, big tobacco is searching for new ways to sell tobacco that do not necessarily include lighting up.
E-cigarettes, vaping and new smoking devices are at the heart of this strategy as wary consumers look for supposedly healthier alternatives.
South Africa’s Control of Tobacco Products and Electronic Delivery Systems Bill will attempt to regulate e-cigarettes for the first time. To date, e-cigarettes have been freely marketed and sold anywhere to anyone.
The proposed new tobacco Bill puts even more pressure on companies such as Philip Morris International to make the move from traditional cigarettes to electronic devices.
But e-cigarette trading has its own controversies, with countries such as Australia slapping e-cigarette packaging with horrendous health warnings, much to the chagrin of manufacturers.
The Heart and Stroke Foundation South Africa has similarly warned that, although e-cigarettes may be a healthier alternative to conventional smoking, there are still many questions about the health risks they may pose.
Globally, 83 countries have regulated e-cigarettes and 27 have completely banned their sale. These include Brazil, Singapore, Uruguay, the Seychelles and Uganda.
At the beginning of this year Philip Morris, the world’s largest publicly traded tobacco company, announced that it would invest in developing technology to provide smoke-free alternatives over the next 20 years.
Philip Morris International’s South African chief executive, Marcelo Nico, told the Mail & Guardian that it made sense to offer smokers less risky alternatives if technology could make it possible.
“For smokers who wish to continue smoking, our goal is to offer smoke-free alternatives that have the potential to reduce the risk of developing smoking-related diseases, as compared to continued smoking,” Nico said.
The company’s strategy is to eradicate harmful chemicals, caused mostly from burning tobacco, he said.
Its IQOS electronic device — which heats tobacco without burning, generating a nicotine-containing vapour that yields, on average, less than 10% of the levels of harmful constituents found in ordinary cigarette smoke — is a major component of its strategy.
Nico said reduced-risk products remained the company’s greatest opportunity to drive long-term shareholder value and that his company was confident in the growth potential for IQOS devices in Southern Africa.
Since Philip Morris’s announcement to “quit smoking”, its shares have fallen by 18% following the release of its latest earnings report.
Nico said any revolutionary product of this nature would invariably face some challenges and predicting its specific growth trajectory accurately would prove to be difficult for some time.