South Africa is bleeding billions in lost revenue to illicit trade. So why hasn't the WHO Illicit Trade Protocol been ratified yet? asks Johnny Moloto.
As Finance Minister Tito Mboweni prepares to deliver his annual Budget this month, how he must bemoan the fiscal crater carved out by South Africa’s illegal economy.
This shadowy world of illicit flows, black market trade and other nefarious tax dodging was estimated – at this time last year – to cost the fiscus R100 billion annually. That’s money Minister Mboweni needs now more than ever.
Regrettably, the Covid-19 pandemic will only have increased this particular damage to his balance sheet, if the experience of the tobacco industry is anything to go by.
The sale of tax-evading cigarettes has been a drain on the fiscus for years, and a 2018 report found that one in every three cigarettes sold in South Africa was illicit.
Although some welcome initial progress was made against the illicit trade after Edward Kieswetter’s appointment as Commissioner at the South African Revenue Service, the lockdown ban on tobacco sales set that into a rapid reverse.
Since the lifting of the ban, illicit brands are now openly available at mainstream outlets, as a recent episode of eNCA’s Crime Watch revealed.
The TV show featured damning undercover footage of cigarettes being sold well below the Minimum Collectible Tax (MCT) level of R20.01 per pack at scores of shops across the country. They showed purchases of South African-made brands for as little R7.20 a pack.
Vendors appeared to have no concern that they would be held to account by the authorities for selling cigarettes on which due taxes had quite obviously not been paid.
But the prevalence of illicit products on such a scale in the mainstream market is intolerable for a law-abiding, tax-compliant company like British American Tobacco South Africa (BATSA).
It should also be intolerable for a Finance Minister who cannot afford over R8 billion a year in unpaid cigarette excise taxes.
With the economy in disarray, steps must be taken to stop the illicit trade leeching vital funds.
The first step should be for the Government to, finally, formally ratify the World Health Organisation (WHO) Protocol on Illicit Trade (“ITP”), which is part of its Framework Convention on Tobacco Control (FCTC) that South Africa signed up to in 2005.
The ITP provides a strict global framework of mandatory guidelines to eliminate the illicit trade in tobacco products.
One of the key measures is a global regime that will track and trace the movement of all tobacco products within a country as well as movements between countries.
Now, there is a misconception about BATSA’s stance towards track-and-trace that our rivals in the illicit trade have been happy to promulgate.
Worryingly, it is a misconception that is also entertained by some organisations that help to shape industry policy, such as Professor Corne van Walbeek, director of the Economics of Excisable Products Research Unit (REEP) at the University of Cape Town.
REEP has done much valuable research to highlight the devastating impact of the illicit cigarette trade and last year it produced three excellent reports showing how the lockdown ban had massively exacerbated the problem.
But I had to take issue with Professor van Walbeek after he was recently quoted in the media suggesting that BATSA opposed the introduction of independent track-and-trace technology and that BATSA is pushing for the adoption of Codentify, a track-and-trace system developed by the tobacco industry.
Nothing could be further from the truth.
BATSA fully supports the introduction of an independent track-and-trace system and I have written to Professor van Walbeek to clarify our position on this once and for all.
As I informed the Professor, BATSA has been pushing for government to urgently ratify and domesticate the Illicit Trade Protocol (ITP). This is a matter of public record. We have stated it repeatedly.
The best, fastest and most transparent way to introduce a truly effective track-and-trace system is for South Africa to ratify the ITP, which explicitly states that any such system must be independent and free from industry influence.
We support the rapid introduction of a track-and-trace system for all tobacco products with interoperable standards, which means that international co-operation is essential.
These standards would be set by the FCTC and protected from vested interests by the FCTC. The mandatory guidelines are very clear.
The sooner this system is introduced, the better. But there will be an inevitable lag between ratification of the ITP and implementation of track-and-trace.
In the meantime, South Africa already has some important tools available to start dismantling the illicit cigarette trade.
Last year, SARS brought in cigarette production counter rules. This means that the tax agency must be provided with, in close to real time, details of every cigarette produced on each and every machine in South Africa.
BATSA is fully compliant with these rules and reports its production volumes to SARS daily.
This means that SARS can reconcile, and accurately audit, BATSA’s production volume, export declarations and excise payments.
This is a first step in the right direction, and it can be a good bridge towards the implementation of the FCTC guidelines-based track-and-trace system.
But, for it to work, all manufacturers need to comply fully with this regulation.
For his own peace of mind, Minister Mboweni might seek to ensure that they are all doing so.
*Moloto is the General Manager of British American Tobacco South Africa. Views expressed are his own.