Edward Kieswetter’s R24 billion headache

South Africa’s flourishing illicit cigarette trade costs the country around R24 billion in excise taxes every year, with the true impact likely to be much higher as VAT is also not paid on the purchases of most illegal cigarettes. 

The South African Revenue Service (SARS) has had a running battle with illicit cigarette dealers since the early 2000s. 

Two decades ago, the illicit trade in cigarettes was estimated to be below 10% of the country’s total cigarette market. SARS appeared to be winning the battle, with specialised enforcement units shutting down illegal tobacco manufacturers. 

However, since 2010, the illicit cigarette trade has boomed due to the entry of smaller local producers and a weakened SARS that was hollowed out by state capture. 

The Tobacco Control Data Initiative’s data shows that by 2017, illicit cigarette consumption had grown to over 30% of the country’s total. 

Following the country’s COVID-19 lockdown rules, which included banning the sale of cigarettes, illicit consumption rose to 60%. It has since moderated slightly to 58% in 2023. 

Illicit cigarettes take multiple forms, making it hard for SARS to effectively clamp down on the growing sector. 

Cigarettes produced legally but are sold without collection of excise taxes, VAT, and any other applicable duties are considered illicit contraband.

Most of these illicit products are produced locally in a legal manner but are then ‘bootlegged’ and sold very cheaply, without any tax collected. 

Other tobacco products might be illegally produced, have fake labels or trademarks, violate intellectual property rights, and may not meet health regulations. 

These counterfeit cigarettes are relatively rare, only making up 2% of global illicit trade. 

In total, including other smaller forms of illicit cigarette trade, this subsector costs South Africa R24 billion in excise duties.

SARS, under Edward Kieswetter, has tried to regain its enforcement capabilities and clamp down on the illicit cigarette trade. 

For example, it has increased enforcement at South Africa’s borders to prevent the smuggling of cigarettes across the border. 

However, as noted by The Tobacco Control Data Initiative, most illicit cigarettes are locally made and are sold without charging excise tax or VAT. 

To combat this, SARS has tried to install closed-circuit television (CCTV) cameras inside the warehouses of local cigarette manufacturers. 

By doing this, SARS was trying to prevent these legally made products from being bootlegged and sold without any tax collected. 

Large tobacco manufacturers like British American Tobacco and Gold Leaf Tobacco have had these cameras installed for years, but other manufacturers have failed to do so.

Earlier this year, the North Gauteng High Court ruled against cigarette manufacturers seeking to stop SARS from installing cameras in their warehouses. 

This was seen as a breakthrough in the fight against the illicit tobacco trade and would see billions in tax collected. 

However, just last week, a new ruling has barred SARS from installing these cameras. 

SARS wanted to use these CCTV cameras to monitor the volume of cigarettes they produce and clamp down on illicit cigarettes entering the market.

Judge Linda Retief interdicted SARS from installing the cameras and said that there was no evidence that the cigarette manufacturers SARS was targeting weren’t tax compliant.

She added that the interdict against installing CCTV cameras would not prevent SARS from collecting tax.

This ruling will make it more difficult for SARS to clamp down on the illicit cigarette trade in South Africa.

Therefore, it is likely that SARS will continue to lose out on billions of tax revenue related to illegal cigarettes.

SARS has previously estimated that the illicit trade, including the sale of products other than cigarettes, costs the economy over R100 billion annually. 

Business Unit South Africa (BUSA) said illicit trade is a threat to South Africa’s stability and economic prosperity.