Why the tobacco industry wants a 0% tax hike and minimum price for cigarettes

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Tax collection from cigarettes has declined, despite successive "sin tax hikes" amid an increase in illicit tobacco products, according to research conducted by economic consulting firm Econometrix, on behalf of British American Tobacco.

The research found that revenue from tobacco excise declined by R1.94 between 2015/2016 and 2017/2018, as per data from the National Treasury.

Finance Minister Tito Mboweni will table his maiden budget speech on February 20, and the state typically raises excise duties and levies or "sin taxes" on high volume daily consumable items such as alcohol, tobacco items and petrol, to raise revenue for the state and discourage consumption of products it believes are harmful.

However, Dr Azar Jammine, chief economist at Econometrix, said while smoking is on the rise, people are turning to illicit cigarettes for their fix, which they buy for R10 for a pack. Tax alone on packets of official cigarettes amounts to R17.85.

Econometrix tested scenarios involving an increase in tobacco taxes in line with inflation of 5.4% in the 2019 budget and found that due to the rising costs, there would be lower volumes sold and revenue to the state would decline. In Scenario C, there is no excise increase in 2019/2020 and overall cigarette volumes would decline by 0.6% while government revenue would increase by 0.1%.

The economics consulting firm recommends a price freeze be implemented until the capacity of the South African Revenue Services (SARS) is improved and law enforcement authorities clamp down on illicit cigarettes.

Minimum price

A minimum price should also be set in the budget speech at around R23 for a packet of R20 cigarettes, according to Jammine, and this was proposed in the 2018 Budget Review by Treasury and the Department of Health.

The issue of illicit tobacco in SA has become a problem in recent years. In research undertaken by survey company Ipsos, on behalf of the Tobacco Institute of South Africa, an estimated 42% of cigarettes sold below the minimum tax owed to SARS (R17.85 per pack) were sold in almost 3 out 4 non-formal shops and the RG brand of had become the largest selling brand in the country.

Fin24 reported in November that Gold Leaf Tobacco denied that its RG cigarette brand was illegal, saying all their brands were registered with SARS and excises were paid on their products.

The Nugent Commission of Inquiry into SARS concluded in December that the investigation of the illicit tobacco trade "was probably" comprised under former commissioner Tom Moyane. It recommended that the capacity to investigate this and other illicit trades should be re-established.

SARS has reported several years of successive tax shortfalls, and the value added tax increase to 15% in April 2018 was implemented to address this.

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