Business Maverick

BUSINESS MAVERICK

Smoke and mirrors: SA Revenue Service faces an uphill battle against illicit tobacco

Smoke and mirrors: SA Revenue Service faces an uphill battle against illicit tobacco
The reality is that it will take SARS years to rebuild the capacity to counter the war on illicit tobacco that existed in the organisation in 2014. (Photo: Gallo Images/Misha Jordaan)

SARS plans to raise billions in extra revenue through increased efficiencies. However, it remains coy on how it plans to counter the scourge of illicit tobacco.

Do a search on the word ‘tobacco’ on South African news sites and it quickly becomes evident that tobacco, and cigarettes, dominated the headlines for more than five months in 2020. 

This is unsurprising, given the government’s ban on the sale of tobacco products and alcohol to help manage the Covid-19 pandemic, to the frustration of most South Africans.

The ban on tobacco products and alcohol sales was lifted in mid-August, although in the case of alcohol it was only a partial lifting. 

However, the consequence of this was quickly felt on the fiscus. The recent Medium-Term Budget Policy Statement (MTBPS) revealed that the South African Revenue Service (SARS) would miss its revenue target by R312.8-billion this financial year due to the depressed performance of the major tax bases amid Covid-19 financial turmoil.

The pressure is now on SARS to improve collections.

“We know that the levels of compliance have been on a steady decline – and we are working hard to arrest that,” SARS Commissioner Edward Kieswetter told an online panel in early November.

He estimates that SARS could raise tens of billions in revenue, over and above that raised from taxes.

The Receiver will do this, he said, by becoming more efficient and tracking down individuals guilty of tax evasion, companies responsible for base erosion and profit shifting, and illicit activity in general. 

Which immediately raises questions about what SARS is doing to recoup the money lost on the illicit sale of tobacco products.

However, the commissioner is reluctant to talk specifically about excise taxes and what SARS is doing to ensure it earns its full dues from cigarette manufacturers. 

It’s conservatively estimated that R8-billion was diverted from SARS and into the illicit economy as a result of the ban on cigarette sales earlier in 2020. 

This makes one wonder why a SARS tender for a national track and trace system — which was cancelled in May as part of Kieswetter’s clean-up process — is not going to be reissued.

The tender was intended to replace the country’s outdated “Diamond Stamp” fiscal marking regime and replace it with key supply chain enhancements. 

This is consistent with recommendations made under the World Health Organisation’s Framework Convention on Tobacco Control and the Protocol on Illicit Trade in Tobacco (the Protocol).

“This new system would have dramatically improved the government’s efforts to address illicit tobacco trade, allowing officials to track cigarettes from their place of manufacture and trace them to the point where all taxes have been paid,” says Michael Eads, MD Sovereign Border Solutions and former executive for customs modernisation at SARS.

The smoking gun is the doing of nothing. Excise has been treated as a small contributor to overall collections and was left behind in the modernisation of SARS. To my mind this is intentional, it’s a case of don’t poke the bear.

The Diamond Stamp is a simple impression that is applied with a die. It is perhaps one of the least effective fiscal marks used today and provides no security features from counterfeiting and no means of counting how many times the die has been used,” he says.

Evidence from other parts of the world, including Kenya, demonstrates that track and trace systems increase tax compliance and are cost-effective.

“Conversely, when cigarettes are smuggled and sold on the black market, tobacco companies enjoy two major perks: they save money by paying less taxes and their products become cheaper for consumers.”

There is no doubt that under Kieswetter and acting commissioner Mark Kingon before him, SARS has taken steps to clean house. But what exactly has changed within the excise division is not clear. 

Beyond saying that SARS is focused on countering “all illicit activity”, spokesperson Siphithi Sibeko said the service could not comment further.

“If SARS is going to get illicit trade right, they need to do a house clean in the excise division. The same people have been in the same positions for years and nothing has changed,” says Eads.

“The smoking gun is the doing of nothing. Excise has been treated as a small contributor to overall collections and was left behind in the modernisation of SARS. To my mind this is intentional, it’s a case of don’t poke the bear.”

In the most recent MTBPS, finance minister Tito Mboweni indicated that SARS’s budget would be trimmed rather than increased.

Large tobacco companies British American Tobacco and Philip Morris International support the implementation of a track and trace system.

“Not only does British American Tobacco South Africa (BATSA) support the urgent implementation of a track and trace system in South Africa in line with WHO guidelines, but we have consistently been on the record calling for it,” says Johnny Moloto, head of external affairs at BATSA. 

“During our oral submissions to Parliament in respect of the Taxation Laws Amendment Bill on the 7th October 2020, BATSA urged the government to immediately ratify the important WHO Illicit Trade Protocol in order to tackle the rampant sale of illegal cigarettes in South Africa,” he says.

“Ratification would mean that the country, which has one of the biggest illegal trades in tobacco in the world, would implement the shared global standards for addressing illicit trade.”

South Africa signed up to these comprehensive international rules seven years ago, but has still not formally ratified this protocol.

“This is the very first thing South Africa should do to tackle the illegal trade in cigarettes. It can be done simply and very quickly,” Moloto says.

Not everyone agrees that Big Tobacco is as supportive as it says it is. A report published in September by STOP suggests that SA’s decades-long efforts to tackle illicit trade are being undermined by interference by the tobacco industry.

“When we look at the global research, over two-thirds of illicit tobacco is genuine product coming from transnational tobacco companies, so they’re continuing to be the key driver of this problem. The industry’s PR talks about counterfeit product and small manufacturers, but the issue continues to be that they are failing to control their own supply chain,” says Allen Gallagher, research associate, Tobacco Control Research Group at the University of Bath and a partner in global tobacco watchdog STOP. “This is why Track and Trace is so important; the whole idea of that as a policy is a direct response to the industry’s failure to control its own supply chain.”

According to the World Customs Union 2019 Illicit Trade Report, published in July 2020, more than two-thirds of illicit tobacco products seized last year came from the big players. 

“They are failing to control their own supply chains. Why is it Diageo or Pernot Ricard don’t have a problem with illicit trade, counterfeit products and the tax authorities? It’s because they control their supply chains,” says Eads.

The reality is that it will take SARS years to rebuild the capacity to counter the war on illicit tobacco that existed in the organisation in 2014. 

Consider that it took project Honey Badger — which targeted the illicit tobacco industry — four years to get to the point that criminal cases, intended prosecutions, customs schedules and lifestyle audits were the order of the day. And to get there, it took several years to get the different parts of SARS to operate across tax types, taxpayer types, business units and investigative units.

All of that takes time to rebuild. It is made more difficult by the fact that SARS is short of about 2,000 staff and needs another R800-million in its annual budget to increase its enforcement capacity and capability, according to Kieswetter. 

In the most recent MTBPS, finance minister Tito Mboweni indicated that SARS’s budget would be trimmed rather than increased.

Which perhaps explains why the commissioner is reluctant to answer questions on the progress that SARS is making on illicit tobacco. DM/BM

Gallery

Comments - Please in order to comment.

  • Alison Effting says:

    Hardly surprising given that smokers were driven to support the illicit tobacco market during the lockdown; perhaps SARS should scrutinise the known benefactors of that trade.

Please peer review 3 community comments before your comment can be posted

We would like our readers to start paying for Daily Maverick...

…but we are not going to force you to. Over 10 million users come to us each month for the news. We have not put it behind a paywall because the truth should not be a luxury.

Instead we ask our readers who can afford to contribute, even a small amount each month, to do so.

If you appreciate it and want to see us keep going then please consider contributing whatever you can.

Support Daily Maverick→
Payment options

Every seed of hope will one day sprout.

South African citizens throughout the country are standing up for our human rights. Stay informed, connected and inspired by our weekly FREE Maverick Citizen newsletter.