Opinionista Savera Kalideen 2 December 2018

Tobacco turf wars: SARS must take steps to put an end to the illicit trade debacle

Ordinary citizens have unknowingly been dragged into a massive turf war between South Africa’s tobacco giants.

The fight has centred on the illicit cigarette trade and share of the market. And has led to tobacco companies bringing their business competition into the public domain yet again, under the guise of raising (legitimate) concerns about weak capacity at the South African Revenue Service. Their unsubstantiated claims are made merely to perpetuate their grip on the lucrative market of smokers in the country.

Recently, the Tobacco Institute of South Africa (TISA) released the findings of an IPSOS study into the share of illicit cigarettes sold in South Africa’s informal trade sector. This is the second TISA-commissioned study released in just four months. According to TISA’s report, South Africa’s illicit trade market grew from over 33% in July to 41.8% this month.

It pinpointed the cigarette brand RG – manufactured by the independent tobacco producer Gold Leaf Tobacco — as the biggest-selling brand in the country. Gold Leaf is not in the TISA stable but in the Fair-Trade Independent Tobacco Association (FITA) along with manufacturers such as Amalgamated Tobacco Company, Best Tobacco and Carnilinx.

The study claims to have identified cigarettes that are sold for less than the minimum tax that tobacco companies must pay the revenue service on each box of cigarettes. This currently sits at R17.85 per pack of 20.

There is little doubt that the illicit trade of cigarettes does exist in South Africa.

But the findings presented by TISA need to be considered in the context of all the developments around the tobacco industry in the last six years. There are a few issues to consider.

Firstly, the evidence presented by IPSOS needs independent verification. The report presents little detail into the methodology that was used to conduct the study which raises questions on exactly how they found out what they did. It is not the first time that the methodology has not been shared with researchers who have made requests for this information.

Secondly, TISA has been funding a multimillion rand “takebackthetax” campaign which fingers the revenue service’s incapacity to collect tobacco tax. According to the campaign – and now the IPSOS report – about R8 billion is lost each year to illicit trade. There is no verification of how this figure is arrived at.

The report must therefore be partially motivated by the fact that TISA themselves do not want an increase in the excise tax payable on cigarettes which could have an impact on their revenue, and that they want the revenue service to clamp down on their competitors which will bring business back to them.

And here South Africans need to consider that they bear the brunt of the public healthcare bill of tobacco-related harm while tobacco industry smiles all the way to the bank.

Each year South Africa loses about R59-billion addressing the harm from tobacco-related illnesses like lung cancer, emphysema, asthma and bronchitis. At the same time, the country only collects between R11-billion and R13-billion from excise taxes on tobacco.

Thirdly, the report must also be seen in broader picture of the evidence presented at the Nugent Commission.

In the interim report that has emerged from former Justice Robert Nugent, based on the commission, he has said that he has not established why the so called “rogue unit” led by former SARS employee Johann van Loggerenberg who was investigating tobacco companies with his team, was thought to be “unlawful”. He has also asked for a new revenue service commissioner to be appointed by President Cyril Ramaphosa with immediate effect, following the dismissal of former commissioner Tom Moyane.

All this is in addition to the dysfunction, severe capacity constraints, outdated IT systems and the climate of fear, distrust and suspicion at the revenue service and the allegations that some tobacco companies have been linked to interference in the ranks in attempts to disrupt their competitors.

These tactics are not unique to South Africa. Similar tactics have been seen across the world. Since last year there have been several reports about investigations by authorities in the UK and EU into managers at BAT (BATSA is a TISA member) for their alleged spying operations in Africa. These have involved allegations of industrial espionage, money-laundering and bribing government officials linked to them.

In South Africa it is well known that several South African politicians have been exposed for receiving funds from tobacco companies.

TISA is correct in their view that illicit trade needs to be tackled in South Africa.

However, the concern is that their calls are an attempt to exempt their members from any scrutiny. Action against the tobacco industry must be taken uniformly to ensure that all cigarette manufacturers are not duping the system in any way.

Tackling the illicit tobacco trade requires a government response that cuts across several departments that form part of the criminal justice sector: the South African Police Services, the National Prosecuting Authority, and the South African Revenue Services.

For at least six years now all these entities have been compromised – and as a result enforcing the illicit trade of cigarettes has fallen by the wayside.

The reality is that the South African Revenue Service is aware of the solution to end this trade in illicit cigarettes and the tax evasion that goes with it. It lies in the adoption of a new system that could intelligently and independently track and trace every single box of cigarettes that is produced in South Africa from manufacturer to retailer, ensuring that both excise taxes and VAT are paid.

In 2012 the country signed the international Protocol on Illicit Trade in Tobacco Products. The protocol includes a commitment to implement an independent “track and trace system” that allows officials to track and trace the manufacture and production of cigarettes in South Africa and its import and export. No manufacturer will be able to deny how much they produce, nor who their product is sold on to. So, every single tobacco manufacturer whether it produces cigarettes that are illicitly sold or not will be held accountable for their products. Unlike the current situation where some tobacco manufacturers operate in both the legal and illicit market.

It’s been six years since this protocol was signed. Yet South Africa has not taken the steps needed to implement the system. The question is why? Why are tobacco companies allowed to operate in this way when the solution is clear and implementable – and lies in an international protocol that we have willingly signed onto?

Government, starting with the Departments of Health and Finance, and with a speedy restructuring of the revenue service, needs to take action now. There is no excuse to continue to give free rein to tobacco companies to undermine both our criminal justice system and our revenue collection system. DM

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

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