Hundreds of thousands of jobs at stake
The South Africa Tobacco Transformation Alliance (SATTA) has launched a national campaign to draw attention to the almost 300 000 livelihoods that are at risk if government continues with its ban on the sale of cigarettes during the Covid-19 lockdown.
The ban on cigarettes sales has now been in place for more than 120 days. During the same period, illegal tobacco sellers have been making millions of rands a day selling smuggled cigarettes to South African consumers. This has resulted in a loss of approximately R4-billion in tax revenue for the South African Revenue Service (SARS).
“The only winners here are the tobacco smugglers and the illicit salespeople,” says SATTA chairman Shadrack Ntando Sibisi. “It is totally unacceptable that a legitimate, taxpaying business sector should be taken to the brink of ruin in such a way.
“Farmers are suffering, as are tobacco processors. Farmers cannot plant with certainty as long as the ban is in place, and tobacco processors are in the dark as to when they can resume activities again. The same applies with manufacturers — the knock-on effect hits the entire value chain.
“Legal tobacco manufacturers have also been adversely impacted. This has led to reduced services of long-standing contracts with suppliers and distributors.”
“Equally, retailers are suffering — in particular, spaza shop owners and small traders, who make the bulk of their profits from selling single cigarettes. They have been unable to trade legally since March, and their livelihoods are at stake.”
SATTA’s research has shown that more than 296 000 people are involved in economic activity across the entire tobacco value chain, and all are directly under threat from the government ban on cigarettes sales.
“Breadwinners are not earning an income, they cannot feed or clothe their families, and they cannot afford to send their children to school,” says Sibisi. It is a disastrous situation, and it has been created by the government without any convincing evidence that a ban on smoking will in any way help to combat Covid-19.
“South Africa is the only country in the world that has banned cigarettes. There is no justification for it, and we call on government to immediately lift the ban and allow cigarettes to be sold in the same way as before the lockdown.”
SATTA has been joined in its campaign — dubbed #LiftTheBanSA — by a number of other stakeholders in the sector. The Black Tobacco Farmers Association (BTFA), for example, is fully behind the campaign, and says its membership — almost 200 black tobacco farmers — are “on the brink of extinction”.
“We are unable to plan or plant; we are unable to harvest or sell. Soon, our businesses will go down the drain,” says BTFA. “Government must immediately lift the ban and allow cigarettes to be sold in the same way as before the lockdown, before it is too late.”
Limpopo Tobacco Processors (LTP), the biggest single supplier of tobacco leaf to domestic buyers in South Africa, has also called for the ban to be lifted.
“Our operations have effectively been put on ice because of the ban. This has jeopardised the economic future of our members and is threatening thousands of jobs across the tobacco value chain,” the organisation says. “We are also concerned at the massive growth in the cigarette black market during the lockdown. According to our calculations, approximately R36-million in tax revenue is being lost every day because of the ban on sales.”
Additional support for the campaign has come from Soweto Business Access (SBA), an advocacy group for economic upliftment in township and villages since 2015.
“We are alarmed at the rate at which the underworld syndicates are now brazenly and openly taking over the tobacco retail sector due to the lockdown regulations,” says SBA. “We urge the government to protect societies from these syndicates by immediately lifting the ban on the sale of cigarettes.”
SATTA launches #Lift the Ban campaign
The South African Tobacco Transformation Alliance’s (SATTA) campaign aims to draw attention to the massive number of livelihoods at risk if the government continues with its ban on the sale of cigarettes during the Covid-19 lockdown, now entering its fourth month.The temporary ban on the sale of cigarettes and other tobacco products is a curious tactic employed by a government to protect the health of its citizens during the coronavirus pandemic. This country was one of just a few around the world to have banned tobacco sales during the pandemic — and is the only one to still have it in place after India and Botswana (the only other two countries) lifted theirs.
Ironically, even the government’s own affidavit to court to oppose lifting the ban points out that the health benefits of the ban are severely diluted by the growing illegal cigarette trade. Anecdotal evidence would suggest that most smokers are still finding a way of getting their hands on cigarettes, because the ban outlaws selling and transporting tobacco, but not the act of smoking. A survey of more than 12 000 smokers by the University of Cape Town found that 90% of them bought cigarettes illegally during lockdown.
Consequently, all that has occurred is that the revenue stream has simply switched from the legal value chain, including South African farmers, manufacturers and retailers — as well as the South African Revenue Service — to an illegal stream, without SARS getting its cut. It is also imperilling the livelihoods of those in the legal value chain while enriching those participating in illegal behaviour.
Even before the ban, South Africa was estimated to be the fifth largest illicit cigarette market in the world, surrounded as it is by countries that grow tobacco leaf for a fraction of the local cost.
“Economic damage to South Africa from the current cigarette ban, which is thought to include the loss of billions of rands in excise tax, will be partly mitigated by economic activity from the growing illegal cigarette trade.” This bold statement is one of the arguments included in court documents lodged by Cooperative Governance and Traditional Affairs Minister Nkosazana Dlamini-Zuma to keep the ban on the sale of cigarettes and tobacco products in place, opposing a second court bid to resume legal trade. The affidavit cites research by Genesis Analytics.
The affidavit predicts the current ban on cigarette sales, if it continued for a full year, would result in an overall annual decrease in sales of about nine billion cigarettes, from 26 billion down to 17 billion. This represents a prediction that the illegal cigarette trade may grow to around 63% of the legal cigarette market before the ban was introduced. These are sales the government will earn no taxes from, and legitimate businesses and workers will earn no revenue or wages from.
The illicit trade
llicit cigarettes are typically cheap. The excise tax on a 20-pack of cigarettes was R17.40 as at February 2020. Adding the VAT rate of 15% means that the full tax amount on a 20-pack of cigarettes is around R20, so if they are being sold for less than R20 they are probably illicit. However, at the moment they come at a high price — a pre-lockdown packet which cost R40 may now go for R70 to R80, a price that fluctuates depending on the number of middlemen and how desperate the customer is.
According to ENACT — an organisation that “builds knowledge and skills to enhance Africa’s response to transnational organised crime” — in South Africa, the largest share of the illicit cigarette market is occupied by those manufactured locally, with other brands smuggled in from neighbouring countries such as Mozambique and Zimbabwe making up the rest. “According to a Directorate for Priority Crime Investigation (Hawks) presentation to Parliament, it was estimated that between April 2017 and March 2018, 80% of illegal tobacco products found in the country were produced domestically.
“Due to their low prices, illicit cigarettes make for an attractive bargain and all indications point to a growing market in the country. In his book Tobacco Wars, Johann van Loggerenberg estimates that illicit cigarettes make up around 40% of the cigarette trade and show ‘no sign of slowing down’.”
Some brands are smuggled into the country, others are hardly-known, bottom shelf local labels, but they’ll do. Traffic police, who used to check one’s licence disk, now routinely search vehicles for cigarettes.
Cooperative Governance and Traditional Affairs Minister Nkosazana Dlamini-Zuma’s affidavit had been lodged in a case brought by the country’s largest tobacco manufacturer, British American Tobacco South Africa (Batsa), and other tobacco groupings to have the ban overturned.
This case is distinct from a challenge launched by the Free Trade Independent Tobacco Association, which represents smaller manufacturers. This association challenged the ban in court and lost. The campaign estimates that around 300 000 workers — and their dependents — rely on tobacco farming. They believe that the total cost to the economy stands at R35-million a day in lost tax revenue, suggesting that R4.07-billion has already been lost to the illicit cigarette market.
Batsa and its co-applicants argue in their court papers that the ban unjustifiably limits the economic rights of farmers and manufacturers, while infringing on the human rights of smokers. The emotional wellbeing of smokers is being harmed by the state’s tobacco ban, says Batsa, arguing that tobacco and vaping products are “similar to coffee in the ways they are experienced and used by consumers”, providing users with “enjoyment, and help them cope in stressful circumstances”.
Banning them, it says, is unconstitutional. Batsa estimated its weekly loss in revenue from the ban at between R300-million and R350-million, while threatening the livelihoods of South Africa’s tobacco farmers, who sell roughly 90% of their stock in the local market.
The tobacco manufacturer estimates that the fiscus had already lost out on roughly R2.4-billion in lost taxes during the first eight weeks of the lockdown, which it says coincided with a steep rise in illicit trade.
Fact-checking smoking’s impact on Covid-19
South Africa’s ban on the sale of tobacco products as part of Covid-19 lockdown regulations is the subject of a court battle, with current medical research coming under the spotlight.
The fact-checking organisation Africa Check finds as follows: “Statistics cited by the minister can be traced to a small review of available evidence published early in the outbreak. This analysed five studies from China, with a total sample size of 1 549 Covid-19 positive patients. Fifty-two of them were current smokers.
“The conclusion that the review reaches, and which has been shared by the minister, is that the severity of Covid-19 is greater in smokers. Are smokers at greater risk? And what does more recently published research reveal? We took a look.”
Africa Check arrived at a very different conclusion to the minister: “Taking a step back and looking at all of the data presented here we can tentatively agree with the hypothesis that smokers are less likely to be admitted to hospital with Covid-19, but once they are in hospital, their outcomes are similar at best and likely worse than non-smokers.”
Though the World Health Organisation advises people to give up smoking during the pandemic and says smoking is linked to a higher risk of severe illness and death from Covid-19 “in hospitalised patients” it does not specify exactly how much greater those risks might be. In another scientific brief published this month, the UN health agency also states there were currently no studies to show if smokers are more susceptible to actually contracting Covid-19.
The fear is that smokers now familiar with bootleg sources may stick with them when the ban is lifted and illicit cigarettes are cheaper again. The illegal cigarette trade forms part of a broader illicit economy. This involves counterfeit goods, motor vehicles, clothing and textiles, movies and music. The revenue from this has also contributed to high-level corruption, political party funding and other criminal endeavours.
Disastrous economic impact
In an interview with BusinessTech, Bernard Sacks, tax partner at financial services company Mazars, pointed to recent estimates that SARS has lost around R3.5-billion in uncollected excise duties on this one product class since March. However, that is an underestimate, he said, as it does not take VAT into account. “According to my estimate, Treasury is probably losing out on around R320-million in uncollected VAT per month. In total, SARS is therefore losing in the region of R1.5-billion per month.
“Again, this is not even the complete picture, since the loss is even greater when you include factors such as the uncollected fuel levies, manufacturers’ and supporting businesses’ corporate profits, and personal income taxes that this industry normally generates.
“We are looking at about R13-billion to R15-billion if this continues until the end of the year,” said Sacks.
If the ban (together with the alcohol ban) is “upheld until the end of the year, we are looking at total losses upward of R30-billion, estimates Sacks. “Once again, that figure is solely a calculation of lost excise duties and VAT — it does not take other lost taxes into account. This shows us just how hard these product bans are hitting the country on a fiscal level.” — all stories by Eamonn Ryan