A pack of cigarettes being sold for R5 in South Africa

The Transnational Alliance to Combat Illicit Trade (TRACIT) has sounded the alarm about South Africa’s growing illicit tobacco market and its impact on the country’s tax income.

With illicit cigarettes now accounting for as much as 75% of the total market, it is having a severely damaging impact on the economy.

This is because illicit sellers do not pay taxes on the products they sell, allowing them to sell a pack of cigarettes for as little as R5.

In a press statement released on Thursday, 26 March, TRACIT explained that the near-exponential growth in South Africa’s illicit cigarette market can be traced back to lockdown regulations introduced during the Covid-19 pandemic.

At the start of the pandemic, the government introduced regulations banning the sale of cigarettes and alcohol.

These policies were framed as a health and safety safeguard, but in reality, they proved to be exactly the catalyst South Africa’s black market needed to thrive.

Rather than not buying any alcohol or cigarettes from legitimate sources during this time, many South Africans turned to illicit sellers.

Now, around six years later, estimates indicate that illicit cigarettes could make up between 50% and 75% of the total market.

TRACIT’s deputy director general, Stefano Betti, said this growth was fuelled largely by local manufacturers under-declaring production to evade taxes.

This, he said, has also led to pricing distortion, which harms legitimate sellers while driving demand to illicit sources.

“While taxes on a legal pack of cigarettes can reach around R25, illegal products are being sold for as little as R5. It creates a completely uneven playing field,” Betti said.

Beyond hurting the legitimate market, the enormous illicit cigarette economy also means the South African Revenue Service (SARS) collects less tax revenue from the tobacco industry than it should.

A study by Ipsos, commissioned by the South African unit of British American Tobacco, estimated that the illicit cigarette trade costs the country around R28 billion every year.

The SA Tobacco Transformation Alliance also previously estimated that, in 2023, South Africans smoked 37 billion cigarettes, but SARS only collected tax on 13 billion.

Clamping down

Betti explained that while South African authorities have taken steps to address this problem in recent years, these efforts remain insufficient to dismantle entrenched illegal supply networks.

“There is much more that can be done,” he said, highlighting gaps in legislation and the need for stronger controls to combat money laundering linked to the illicit tobacco trade.

He also pointed to ongoing legal battles involving SARS, noting that while authorities are pursuing the right approach, such cases are complex and slow-moving. 

Betti warned that even when enforcement actions succeed, the underlying infrastructure that supports illegal tobacco distribution often remains intact.

“The networks and infrastructure created by the cigarette ban during the Covid-19 lockdown don’t just disappear,” he said. “That is what makes this so difficult to eliminate.”

In addition, another factor complicating stricter enforcement is that in some cases, customs officials themselves are involved in illicit trade.

“Corruption remains a major risk, with estimates suggesting that up to half of customs officials could be vulnerable to corrupt practices,” Betti said.

SARS Commissioner Edward Kieswetter recently said the tax authority is clamping down on its own employees who accept bribes and are involved in the illicit economy.

“SARS has been investigating allegations that customs-inspection teams colluded with clearing agents and importers to manipulate physical inspections in exchange for cash bribes,” the taxman said. 

“Financial analysis identified under-declared taxable income exceeding R45 million, resulting in income-tax prejudice of about R18 million.”

Kieswetter said this move forms part of a concerted effort to protect South Africa’s fiscus, which is being bled dry by an ever-growing illicit market.

“Far too many of our employees work diligently, with utmost dedication and integrity, in pursuit of that higher purpose, for their efforts to be undermined by a few who choose to collude with criminals,” he said.