Supplementary Budget 2020

OPINION: A minimum cigarette price won’t solve SA's illicit trade problem

A call by Econometrix to introduce a minimum price for cigarettes needs rigorous scrutiny.

The economic consulting firm has suggested to the National Treasury – ahead of Finance Minister Tito Mboweni’s budget speech next month – that a minimum price for cigarettes should be introduced. And this should be set at R23 for a pack of 20 cigarettes.

This recommendation emerges from a study Econometrix did for British American Tobacco South Africa (BATSA), in which they claim that the country has collected fewer taxes from cigarettes despite the successive increases in excise tax on tobacco between 2015 and 2018.

They claim that the increase in the availability of illicit tobacco products is the reason for the drop in excise tax collection.

And they project through modelling that an increase in the tobacco taxes would mean lower volumes of cigarettes would be sold, and as a result, state revenue would decline.

They further suggest that the price of cigarettes be frozen until the South African Revenue Service (SARS) is able to improve collection, and law enforcement authorities can clamp down on the illicit trade. In addition, they suggest that a minimum price on cigarettes should be introduced.

A tool in the turf war

Minimum pricing has been introduced in a few countries across the world in both the alcohol and tobacco sectors. It has worked in those countries that have good criminal justice systems and where there is enforcement and prosecution of transgressors. Switzerland, for example, introduced a minimum pricing policy on alcoholic beverages, and were able to enforce this with ease.

None of the necessary enforcement layers needed for minimum unit pricing exist in South Africa. Here the revenue service has still not been able to ensure tax compliance from some tobacco manufacturers.

Instead, in the South African context, the minimum price suggestion should be seen for what it is: a tool in the turf war between BATSA and the smaller tobacco manufacturers who have allegedly eaten into BATSA’s market with cheaper cigarettes. The minimum price is a mechanism to ensure that the prices of the products of smaller manufacturers are significantly increased, even while there is insufficient enforcement.

This is not to say that the National Council Against Smoking endorses the smaller manufacturers or BATSA. We acknowledge that the illicit trade is a reality in South Africa. It must be addressed and curbed. But it must be recognised as an act of criminality that must be stopped by the criminal justice system in our country. It cannot be used to undermine the implementation of evidence-based healthy public policy such as an increase in excise taxes on tobacco.

Global studies have shown that taxation on tobacco products brings in revenue for Treasury, but more importantly, reduces the consumption of tobacco. This is an excellent public health policy which both Econometrix, and in this case BAT, are trying to use this research to undermine.

Oversight of the products of the tobacco industry, and therefore, control and reduction of the illicit trade, is managed by SARS, who are also responsible for tax collection. Our laws provide a framework that enables SARS to increase its surveillance of the tobacco industry, and thereby ensure that no taxation is lost to the illicit trade.

This monitoring of the tobacco industry needs to be done without the involvement or oversight of the tobacco industry – it is merely their compliance that is required. They cannot be allowed to sit on any task team within SARS that is responsible for monitoring the tobacco industry because it is ludicrous to expect them to police themselves: it is up to state agencies to do so independently of any tobacco industry involvement.

The disarray in the revenue service is well documented. As we have all heard over recent months, SARS has outdated computer systems and has lost experienced capacity that would have been able to ensure an efficient tax collection service. So, the drop in tobacco excise tax revenue cannot only be attributed to an increase in the illicit trade, but more to this continued state of disarray and ongoing capacity challenges at SARS.

Less tax across all sectors

The capacity challenges have impacted on its ability to collect all taxes – not just tobacco taxes, so the Econometrix analysis, and ‘solution’, do not make sense at all. They fail to acknowledge that SARS has collected less tax across all sectors – not just the tobacco sector.

Tobacco taxation is fully supported by both the World Health Organisation and the World Bank, who see it as a win for public health, and a win for public finances. South Africa earned R13 billion in excise taxes on tobacco while we spent R59 billion on tobacco-related health harm in 2014/15. The Econometrix research should have recommended an increase in excise taxes to recoup this loss to the fiscus, and in effect, the taxpayer. Surely this loss to the fiscus and taxpayer through this unsustainable public health burden warrants state action to reduce the public health burden? Yet Econometrix suggests no increase in excise taxes on tobacco, thereby forcing ordinary South Africans to continue to subsidise the multi-billion-dollar tobacco industry.

There is a solution to the illicit trade, one that the National Council Against Smoking has consistently called for: government needs to ratify and implement the Protocol on Illicit Trade in Tobacco Products (ITP). This is an internationally recognised tool to monitor the tobacco industry and ensure that all tobacco products can be tracked from factory to consumer and all other points along the way, both locally and regionally, as well as globally.

The criminality of the illicit trade is not just a South African problem: there is both global and regional evidence to show that the illicit trade is intimately linked with many of those engaged in the legal trade of tobacco.

Given the existence of the illicit trade in South Africa, the country has an obligation to implement a system that will track and trace the manufacture, import and export of tobacco products - and in so doing, tackle the illicit trade. The ITP, and not a freeze or reduction in the excise tax on tobacco, is the way to tackle the criminality that is the illicit trade in tobacco.

Savera Kalideen is the Executive Director of the National Council Against Smoking.

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