Edward Kieswetter kisses R24 billion a year goodbye

South Africa is losing R24 billion a year in tax revenue from the trade in illicit cigarettes, with over 70% of the country’s tobacco coming from illicit sources. 

The impact of the illicit trade in cigarettes is not only felt by the fiscus but also by legitimate producers in the tobacco industry. 

British American Tobacco’s (BAT) South Africa unit has cut 184 jobs since 2018 in response to declining sales as illicit traders dominate the market.

The area head of corporate and regulatory affairs at BAT, Johnny Moloto, revealed this and said it was due to government intervention during the Covid-19 pandemic. 

“This has been a long time coming, This problem started emerging around 2010 with an influx of ‘duty not paid’ cigarettes into the South African market,” he told 702. 

Duty not paid refers to products that have been sold without the collection of excise tax and, in some cases, VAT due. 

In 2010, these products made up around 26% of the total tobacco market in South Africa. Now, BAT’s data indicates they make up over 70%. This is a complete flip in just over a decade. 

Since 2010, the illicit trade of cigarettes has soared as SARS was hollowed by state capture, and smaller local producers made it harder to prosecute offenders. 

This really accelerated during the Covid-19 pandemic and its associated lockdowns, with the government taking drastic steps to stop the spread of the virus. 

One of the interventions imposed on South Africans was the banning of the sale of cigarettes, which was crazy, said Moloto. 

Illicit players were thus able to develop a supply chain and a route to market, enabling them to dominate the market. 

“It was a government intervention that inflamed this situation and flipped the market on its head,” he said. 

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

Its effect is much broader than tax collection, with BAT cutting 184 jobs since 2018. The company has been forced to reduce the amount it distributes to traders as it has been priced out of the market. 

“This is industrial-scale criminality. It is horrible to be a legitimate player in this sector. It has become unsustainable from a manufacturing point of view.” 

“We are very seriously at the point where we are reviewing our operations in South Africa.” 

SARS tries to crackdown 

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. 

Since 2019, SARS under Edward Kieswetter has tried to regain some of its enforcement capability but is fighting an uphill battle. 

Moloto explained that the fight against illicit cigarettes is difficult because the ‘illegal’ products are of such high quality they cannot easily be separated from their legal counterparts. 

The only difference is that no tax is paid on one pack of cigarettes, and often, the only evidence that this is the case is the unrealistically low price the pack is sold for. 

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. 

Kieswetter has set up a dedicated team within SARS to focus on the illicit trade, clamp down on major players and pursue the ill-gotten profits from this business. 

He said the team has already dealt with around 1,230 cases of illicit trade and raised almost R80 billion in tax assessments, of which R36 billion has already been collected. 

The team has raised R20 billion in assessments from the illicit tobacco trade alone, with around 100 cases currently underway and R4 billion already collected. 

Kieswetter called on other law enforcement agencies to help SARS, saying that many of the illicit trade businesses engage in organised crime and operate across borders. 

Collaborative efforts have proven highly effective in the past, with SARS’ National Customs Enforcement Team joining forces with the police and defence force to intercept truckloads of illicit cigarettes earlier this year.

Moloto disputed the effectiveness of this campaign, saying the easiest solution would be to introduce a minimum retail price on tobacco products. 

This would prevent illicit producers from undercutting legitimate businesses and make tax-free products more easily recognisable to consumers and law enforcement agencies.