- Tax Justice SA has issued a report in the flourishing illicit cigarette industry in South Africa.
- TJSA founder Yusuf Abramjee says illicit cigarette sales are costing government "billions of rands" in unpaid taxes.
- Vendors appear not to fear law enforcement and many seem not to know or care about the minimum tax threshold.
The sale of illicit, tax-evading cigarettes has become "endemic" across South Africa in the wake last year’s 5-month Covid-19 lockdown blanket ban on tobacco trade, according to an undercover investigation and subsequent report by Tax Justice SA (TJSA).
TJSA’s undercover team visited over 40 mainstream retail and wholesale outlets across Cape Town, Johannesburg, Pretoria and Durban to secretly film cigarettes being sold at a price below the minimum tax that must be paid on them by law.
TJSA considers all cigarettes sold at R25.00 a pack or below to be illicit, since, in its view, such a price cannot possibly cover the cost of manufacture and distribution on top of the Minimum Collectible Tax (MCT) of R20.01 due on each pack (R17.40 excise plus R2.61 VAT). An even lower threshold of R20.00 – therefore below the actual MCT – was adopted for the study.
"Mainstream retail outlets nationwide brazenly display illicit cigarettes at prices that are barely a third of the taxes that are due on them. Vendors fear no action by authorities and laugh at the threat of prosecution," TJSA said in a statement on Wednesday.
"Two retailers openly sold our researcher illegal cigarettes with nicotine levels above South Africa’s legal 1.2mg limit, with one filmed explaining that they had been smuggled from Mozambique and no tax had been paid."
According to the TJSA report, seen by Fin24, the illicit cigarette market is dominated by brands belonging to members of the Fair-Trade Independent Tobacco Association (FITA) and the Gold Leaf Tobacco Corporation (GLTC). The allegations have been strongly denied by both organisations.
TJSA founder Yusuf Abramjee said illicit cigarettes are being openly sold at mainstream outlets throughout the country, costing government "billions of rands" in unpaid taxes. Abramjee founded TJSA to campaign for "a lawful and prosperous South Africa and for urgent action against criminals who steal billions in legally due taxes every year".
"Following the lockdown ban on legal sales - when all cigarettes became illicit - the big players in the illicit trade have seized control of the mainstream retail supply, creating the biggest and most brazen cigarette black market in the world," Abramjee said in the TJSA statement. He estimates that two in every three cigarettes sold in SA is now illicit - an estimated annual R8 billion being lost to government in unpaid "sin" taxes.
He wants to know why it is not a priority for lawmakers and enforcers to combat this and accuses them of turning a blind eye. TJSA has delivered a report of its investigation, featuring hours of undercover footage, to the police, the SA Revenue Service (SARS) and the Departments of Health and Trade.
No fear of reprisals
The SA Tobacco Transformation Alliance (SATTA) has also called for urgent action from authorities in the wake of the TJSA report.
"Vendors appear to have no fear of reprisals from law enforcement and many seem not to know or care that their prices are below the minimum tax threshold of R20.01 per pack. This disturbing report is graphic proof that illicit cigarette manufacturers have taken over the market," commented SATTA spokesperson Zacharia Motsumi.
"They were empowered by the lockdown sales ban and their networks are now firmly entrenched in the South African cigarette market. These criminals are a direct threat to the livelihoods of our members in the legal industry and they are draining billions of rand from the fiscus at a time when that money is desperately needed."
SATTA recognises that law enforcement agencies and SARS' capacity are stretched, but, like the TJSA, wants to see dealing with the illicit cigarette issue as a national priority. SATTA is calling for stronger enforcement of the trading laws and the introduction of a minimum price level (MPL) for cigarettes, supported by a deterrent criminal penalty regime.
FITA chairperson Sinenhlanhla Mnguni said on Wednesday the organisation does not wish to give any legitimacy to TJSA and its "so-called investigation".
"We note that the overwhelming majority of the cigarette brands featured [in a TJSA documentary] do not belong to FITA members," said Mnguni.
"It is no surprise that this latest attack on FITA and its members comes not too long after another attack from a front group of big tobacco directed at local cigarette manufacturers. Until TJSA plays open cards and discloses who its funders are, its independence will continue to be questioned."
In Mnguni’s view, the TJSA documentary was also used as a platform to spread misinformation about certain practices in the tobacco industry, in line with what he claims has been the narrative spread by the multinationals, particularly in relation to pricing and related legalities.
"We have, for instance, over the years seen multinational brands selling below the minimum collectable tax (MCT). Yet, for some reason, Abramjee does not make the same noise about these brands being sold illegally. This begs the question why?" asks Mnguni.
Ahmed Ismail, a spokesperson for Gold Leaf, said the accusations made in the TJSA report would have to be investigated and appropriate action taken.
Raees Saint, chair of the South African Tobacco Organisation (SATO), responded that the organisation supports the fight against illicit trading and notes the report that counterfeiting is prevalent within the black market, something which, he says, SATO's member Gold Leaf Tobacco has been fighting against for many years.
He too regards a documentary based on the TJSA investigation as "an advertisement for big tobacco".
"In some scenes of the documentary it demonstrates BATSA products selling for R40 and R50, yet these products are also available for well below R20. In fact, we did a test purchase recently where we were able to buy a pack of Rothmans for R17.50 from a retailer," said Saint.
In SATO's view, the documentary has been "crafted for a competitive purpose" and the organisation condemns the usage of its members' brands in the documentary, because in its view, "regular" viewers, will construe these as illegal.
British American Tobacco SA (BATSA), the country's largest cigarette manufacturer and a member of SATTA, along with SATTA and a few other organisations, successfully challenged the blanket tobacco ban in the Western Cape High Court last year. The court ruled that the ban was unnecessary.
BATSA’s arguments included that the ban would fuel the illicit trade in tobacco. Government has applied to the Supreme Court of Appeal for leave to appeal the BATSA judgment, a move which BATSA indicated it will oppose.
UPDATE: BATSA too has expressed "outrage and deep concern" about the report which indicates the widespread sale of tax-evading cigarettes at both formal and informal retail outlets throughout South Africa.
"Every tobacco manufacturer must pay excise, so that we preserve the value chain and add value to the economy," a A BATSA spokesperson said in a statement on Wednesday.
"Every manufacturer has to be compliant with the recently introduced production counter regulation in South Africa, SARS have to ensure that they get oversight of each single cigarette which is produced here. The scale of this illicit market is outrageous and it is time authorities take action against any offenders."
BATSA has urged the government to ratify the World Health Organisation's Illicit Trade Protocol, as it would allow the government to accede to the same standards as the international market for the tobacco industry. This will allow for a track-and-trace system, which would necessitate that tobacco companies account for every single cigarette they produce and pay tax for it.
BATSA denies allegations that it funds the TJSA.
UPDATE: According to Abramjee, the TJSA report is an independent report carried out by himself and his fellow directors, who are "long-standing anti-crime campaigners".
"When TJSA has expenses it uses its own very limited funds. Buying these illegal cigarettes did not cost very much money because they were all sold, illegally, so cheaply," said Abramjee. "If the brands belonging to FITA and GLTC were being sold at the legal price, we would not have been able to afford to buy them in so many shops."
The report states that national sales data by the University of Cape Town unit for research on economics of excisable products (REEP) were used.
* This article was updated with comment from BATSA and further comment by Abramjee.