Taxes to ashes: The smoking gun

The government has been increasing taxes on cigarettes for years so it is no surprise to learn that the taxman gets R17 from a pack of 20 selling for R30. Yet a smoker can buy a pack for as little as R7.

At a café and two supermarkets in southern Johannesburg, the Mail & Guardian bought a brand known as RG for R7 at one, for R10 at another, and paid R12 for a flavoured version. They all carried the usual health warnings.

RG, manufactured by the Gold Leaf Corporation, is now South Africa’s biggest-selling brand, according to a survey by research firm Ipsos for the Tobacco Institute of South Africa (Tisa). It eclipses established brands such as Marlboro, Peter Stuyvesant and Dunhill.

But Gold Leaf has denied the claims made by Tisa and Ipsos and says it is not involved in wrongdoing and is fully tax compliant.

The company’s Raees Saint said: “We have been regularly audited by Sars [South African Revenue Service]; we never had issues.”

He said the report was targeting specific companies instead of dealing with the illicit trade of cigarettes in its totality. “Illicit trade affects us as well.” Saint said for a private entity to release a report claiming Gold Leaf was selling illicit cigarettes was unethical and unfair.

The Ipsos survey of 2 030 outlets found that 42% of cigarettes sold in the informal market are sold below the minimum collectible tax (MCT) of R17.85 a pack. The survey found that 89% of RG cigarettes retail below the MCT.

Tisa said illicit cigarettes that sell below the MCT cost the fiscus R8-billion in lost revenue and threaten both jobs and the sustainability of the industry.

READ MORE: Illegal cigarette brand a top seller in SA

“We are at the tipping point. If Sars and government do not act against criminality, the legal industry will be dead in one to two years from now,” Tisa’s Francois van der Merwe told journalists at a press conference this week. He said tax evasion was a crime.

Van der Merwe blamed Sars for not doing its job. “They need to collect all collectible tax in this country but they do not.”

Besides RG, other cheap brands on sale at the outlets visited by the M&G included Sharp, Savanna and Chicago, which were selling for R12. Another brand, Sahawi, was selling for R10.

Ipsos found that the sale of illicit cigarettes in the informal market had increased from 33.4% in June to 44% in October. The study includes supermarkets but excludes hawkers and taverns.

The head of external affairs of the JSE-listed giant British American Tobacco South Africa, Johnny Moloto, said it was shocked by the rapid growth rate of illegal cigarettes.

“Our sales volumes have declined by 30% in the past three years solely as a result of illegal trade. As the last local legal manufacturer of cigarettes, we [contribute] 83% of the excise tax paid annually to Sars, but are less than 50% of the market according to Ipsos,” he said.

Moloto said the company had retrenched employees because of the amount of business it had lost, and the illicit brands of cigarettes did not support local farmers. “The company purchases 90% of the tobacco leaf grown in South Africa but, as our business declines, the 10 000 jobs on those farms and their 30 000 dependents are at great risk.”

Van der Merwe said: “A project by Sars called Honey Badger was meant to probe the production of illegal tobacco sales but has not been effective.”

He said the tax on tobacco depended on honesty and Sars should not go after small businesses and criminalise them because they were not at fault. Manufacturers needed to declare their volumes before distributing their products to the market, he said.

The Nugent commission of inquiry into tax administration and governance heard from the former head of enforcement at Sars, Gene Ravele, that investigations of illegal cigarettes were stopped.

“After I left Sars [in May 2015], that unit was told ‘you are not going to do any inspections at cigarette factories’. To this day, no inspections at cigarette factories have happened. So how do we know if people pay tax?”

The National Council Against Smoking’s Savera Kalideen said it did not endorse the research by Tisa, but it was against cigarette traders who break the law.

Kalideen said the growth in illicit cigarettes had serious health implications because, beinge affordable, more people are likely to smoke them.

“All of us as taxpayers are subsidising RG and the whole tobacco industry because their product is cheap; as they are not paying their taxes, we have to subsidise the health system,” she said.

Kalideen said, in countries where there was an increase in corruption, there was a surge in illicit trade of cigarettes and smuggling. The way to clamp down on unlawful manufacturers was to station Sars officials at cigarette manufacturers, she said.

Sars said it had seen the Ipsos report and would comment when it was ready to do so.

Tshegofatso Mathe is an Adamela Trust business journalist at the Mail & Guardian

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Tshegofatso Mathe
Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian.

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