Edward Kieswetter kisses R119 billion goodbye

A new study by the University of Cape Town (UCT) revealed that the government lost R119 billion in excise and VAT revenue between 2002 and 2022 because of the illicit cigarette market.

Nicole Vellios and Corne van Walbeek from the research unit on the economics of excisable products at UCT’s School of Economics conducted the study.

This research was funded by the Bill & Melinda Gates Foundation through the African Capacity Building Foundation.

The researchers found that the government has been losing significant revenue by not receiving excise and VAT from all cigarettes consumed in South Africa.

“This trend is likely to continue if the government does not secure the supply chain from the point of production to the point of sale,” they said.

There has been a huge increase in the illicit cigarette trade in South Africa over the last few years, fuelled by the cigarette ban during the Covid-19 pandemic.

Illicit cigarettes comprised only 5% of the market in 2009. However, following the cigarette ban, it peaked at 60% in 2021 and maintained that level in recent years.

This resulted in the government losing R15 billion in excise revenue and R3 billion in VAT revenue in 2022.

The study found that, from 2002 to 2022, the government lost R119 billion in excise and VAT revenue. Most of the lost revenue occurred from 2010 to 2022.

The University of Cape Town’s study loosely aligns with previous estimates regarding the impact of the illicit cigarette trade in South Africa.

Tax Justice South Africa’s Yusuf Abramjee said as much as 70% to 80% of the cigarettes sold in South Africa are illicit.

He highlighted that the minimum collectable tax on a packet of 26 cigarettes is around R23. However, many smaller shops sell these packs for as little as R10.

Tax Justice SA estimates that more than R20 billion in tax revenue was lost in 2022 due to the illegal tobacco trade. This is slightly higher than the R18 billion UCT estimate.

Fightback against illicit cigarette trade in South Africa

A new ruling by the North Gauteng High Court against illicit tobacco traders could significantly impact the South African Revenue Service’s (SARS) tax collection efforts in 2024.

Several cigarette manufacturers recently failed in their urgent bid to interdict SARS against installing closed circuit television (CCTV) cameras at their warehouses.

These cameras will allow the revenue service to monitor these warehouses and the volumes they produce. This will help to clamp down on illicit cigarettes entering the market.

Abramjee called the ruling “a vital legal breakthrough against illicit tobacco traders stealing billions of rand from South Africa”.

He said this surveillance would go a long way in cutting down on and stopping the illicit trade and the manufacturing of these goods in the factories.

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.

This ruling by the High Court will now allow SARS to install and monitor CCTV cameras in these manufacturers’ warehouses.

The Fair Trade Independent Tobacco Association (FITA) was one of the organisations seeking an interdict against this ruling.

Abramjee said FITA represents around 80% of the smaller manufacturers known for selling popular brands on the illicit market.

He said this ruling is a legal breakthrough because the country’s illicit cigarette trade is growing by the day, with billions of rands lost annually in revenue collection.

“They are stealing billions of rands annually, and we’re urging the authorities to enforce the law to prevent the industrial-scale looting,” he said.