Sars plan for illicit tobacco still being refined

The nearly five-month ban on the sale of cigarettes has exacerbated South Africa’s illicit tobacco trade problem, and exposed the inability of the South African Revenue Services (Sars) to fight it, experts say. 

According to Professor Corné van Walbeek, director of the Economics of the Excisable Products Research Unit (Reep) at the University of Cape Town, the ban has cost Sars R1.2-billion per month on excise tax, with a total of about R4.8-billion so far.

But Sars says that its integrated strategy, which it is still refining, is working and has produced some results including collecting revenue of about R191-million in the past five months. This, however, follows Sars’s cancellation of the track-and-trace tender because of concerns that Commissioner Edward Kieswetter said were raised when he arrived in May last year. 

“I was concerned about how the track-and-trace system would support the new Sars strategy … on the illicit trade in tobacco. The track- and-trace system is but one mechanism at the end of the supply chain. The Sars compliance strategy on the illicit trade in tobacco is premised on data-driven prioritising and co-ordinating control of the entire supply chain, from the fields where tobacco leaves are grown, or the port of entry, to the final purchase by the individual consumer and enforcement of tobacco regulations,” he said. 

Cigarettes under lockdown

In the interim, the lockdown has led to an under-recovery of R82-billion of taxes for the fiscal year through July 15, Kieswetter said in an interview with Bloomberg. 

Although the illicit trade market has been thriving in South Africa for years, the ban has exposed Sars’s seeming inability to control the cigarette supply chain. 

Professor Lekan Ayo-Yusuf from the Africa Centre for Tobacco Industry Monitoring and Policy Research, which offers up-to-date information on activities and developments in the tobacco industry, said that the ban has also amplified and exposed the already existing underhand activities of the industry. 

“In fact, we believe that the decision of the government to allow the industry to resume production of cigarettes in May, supposedly for export only, fuelled the illicit trade as these cigarettes might have either not eventually been exported or were exported only to return to the country (round-tripping).”  

Van Walbeek told the Mail&Guardian that their research shows that only 1 to 2% of popular cigarette brands were sold during the lockdown compared to 70% before the ban was enacted. 

South Africa’s tobacco industry is run by multinational companies such as British American Tobacco (BAT) and Philip Morris International. Then there are independent or local producers which fall under the Fair Trade Independent Tobacco Association (Fita). Companies in this group include Gold Leaf Tobacco Corporation and Carnilinx Tobacco Company. 

In a statement released by British American Tobacco South Africa (Batsa) this week, it called on the South African government to ratify the World Health Organisation (WHO) protocol to eliminate illicit trade in tobacco in order to eradicate the illegal sale of cigarettes in the country — which it claims is the largest in the world. 

Batsa said the ratification would mean that the country would implement global WHO track-and-tracing guidelines. The tobacco company said that its market share has dropped from 48% prior to lockdown to 8.7% in June. 

Batsa said the brand RG, which is owned by Gold Leaf, managed to sell 10-million cigarettes every day during lockdown at prices that were up to five times higher, despite no tax being paid. 

Van Walbeek said: “All cigarette companies have been involved in selling cigarettes during the lockdown, some are just more successful than others.” 

He explained that Fita had the advantage even before the lockdown in that they were entrenched in the informal market where they would sell their products to informal traders, street vendors, spaza shops —and not necessarily formal shops or big retailers. “They had a good pipeline into the informal market,” he said. 

“All the formal shops, supermarkets, garages; they kept to the rules quite significantly because they knew that they were being watched.”  

Track and trace

Last year April, Sars issued a track- and-tracing tender, but it was pushed back. The technology would allow for Sars to see upfront where the product is intended to go and the route it took from the manufacturer. 

The tender has been extended four times since the first extension on August 30 2019. This was to allow the new commissioner to apply his mind and consult.  

On May 10 2019, Sars had a non-compulsory briefing session for prospective bidders for the production management and track-and-trace solutions for cigarettes. The M&G saw the register, which recorded companies such as Tobacco Institute of Southern Africa (Tisa), Bidvest, BAT and Deloitte as bidders.

Kieswetter told the M&G this week that those who had applied for the tender and others raised concerns about the nature of the tender specifications and the level of consultation, among other issues. 

He added that there were no adequate reasons for investing at the end of the tobacco value chain as opposed to the beginning or middle.

He also said that the proposed governance that would come with the system would contradict the WHO’s view that track-and-trace be under government control. 

“Sars continues to refine its compliance strategy on illicit trade in tobacco in consultation with the rest of the government.”  

A way forward

At this stage, it seems Sars is still building its strategy to adequately fight the illicit tobacco trade. Van Walbeek said he does not understand why the revenue service is stalling because the technology exists and is used for medical products. 

Ayo-Yusuf said that the biggest obstacle is the tobacco industry and their allies. He said they should demonstrate political will. Only six years ago the revenue service was well on track to getting a handle on the illicit trade but the previous unit, designated to fight the illicit economy, was disbanded in 2014 during Tom Moyane’s reign.

In 2018, the revenue’s acting commissioner Mark Kingon reintroduced the illicit economy unit, which is meant to counter illegal markets, including cigarettes. Though no details are available about the work of the new unit, Sars has in the past five months seized cigarettes to the value of R92-million, has collected revenue of about R191-million and collected 639 outstanding returns.

According to Kieswetter, the revenue service will continue to refine its compliance strategy in consultation with government and law-enforcement agency partnerships. 

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

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

Related stories

Companies need to plan for the future through skills development

COMMENT: Businesses need to focus on the training the so-called soft skills needed to respond to an ever-changing environment

See people as individual humans, not as a race

We need to ingrain values of equality in education, businesses, society broadly and religious groups to see people

Africa needs businesses that build and strengthen the continent

Africans should know by now that they can’t depend on leaders and should rather learn to do it themselves

Restaurants and taverns traded in alcohol despite the bans

An entirely new supply chain has now been created, and of course it’s untaxed

Zuma vs Ramaphosa? Neither is the leader South Africans deserve

Neither statesman could command sufficient authority in an ANC that remains mired in corruption and infighting and at the behest of big capital

Sars is running more smoothly, but still missing targets

The revenue service said that change in compliance behaviour of taxpayers has been observed since April

Subscribers only

FNB dragged into bribery claims

Allegations of bribery against the bank’s chief executive, Jacques Celliers, thrown up in a separate court case

Dozens of birds and bats perish in extreme heat in...

In a single day, temperatures in northern KwaZulu-Natal climbed to a lethal 45°C, causing a mass die-off of birds and bats

More top stories

North West premier goes off the rails

Supra Mahumapelo ally Job Mokgoro’s defiance of party orders exposes further rifts in the ANC

Construction sites are a ‘death trap’

Four children died at Pretoria sites in just two weeks, but companies deny they’re to blame

Why the Big Fish escape the justice net

The small fish get caught. Jails are used to control the poor and disorderly and deflect attention from the crimes of the rich and powerful.

Koko claims bias before Zondo commission

In a lawyer’s letter, the former Eskom chief executive says the commission is not being fair to him

press releases

Loading latest Press Releases…