Cigarette war goes radioactive

Written by Ciaran Ryan. Posted in Journalism

Tax justice group says two of every three cigarettes sold in SA is illicit, robbing the fiscus of R8bn a year. Small tobacco manufacturers say the group is a front for Big Tobacco. From Moneyweb.

It seems forcing smokers to get their fix illegally during the ban has normalised the act among retailers and consumers. Image: Shutterstock
It seems forcing smokers to get their fix illegally during the ban has normalised the act among retailers and consumers. Image: Shutterstock

A new report by Tax Justice SA (TJSA) finds that two of every three cigarettes sold in SA are illicit, making SA possibly the world’s largest black market for cigarettes.

This is costing the fiscus R8 billion a year. A TJSA researcher visited 43 retail outlets in four different cities and in all but one of these outlets was able to buy cigarettes for less than R20 a pack.

“TJSA considers all cigarettes sold at R25 a pack or below to be illicit, since 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),” says the report, which formed the basis of a video documentary.

Read: Tobacco giant calls for zero tolerance on tax evasion by illicit suppliers

TJSA points the finger of blame at members of the Fair-Trade Independent Tobacco Association (Fita) and Gold Leaf Tobacco Corporation, which recently broke away from Fita.

Ban

The government placed a ban on all cigarette sales on March 27, 2020 to help slow the spread of Covid-19, but a study by University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep) found that at the height of the ban, 93% of smokers were able to buy on the black market.

Read:Tobacco ban unconstitutional and invalid (Dec 14, 2020)

Government to appeal ruling against tobacco ban (Jan 5, 2021)

A Reep study in July 2020 showed that market share by multinational tobacco companies (British American Tobacco, Philip Morris International, Japan Tobacco International and Imperial Tobacco) had collapsed from 74% to just 17%.

The Reep authors have called for a substantial increase in excise duties on tobacco on the grounds that the market appears able to bear much higher prices.

“Tobacco control advocates agree with our recommendation that the excise tax be substantially increased and are calling for a doubling of the excise tax when the next budget is tabled in parliament,” says the Reep report. “The evidence from the surveys conducted by Reep suggests that this is feasible.”

Market share

Market share has slipped from multinational tobacco producers to “smaller” ones like Gold Leaf Tobacco, which Reep estimates captured a 26% share of the market, Carnilinx (14%) and Best Tobacco Company (11%).

When the ban was lifted on August 18 last year, after 144 days, the effect of lockdown on the smoking landscape became clearer.

Forcing smokers to buy illegally during the ban had normalised the act of selling and buying illicit brands for both retailers and consumers.

Fita brought a court action against the government late last year to have the ban lifted. This was ironic, noted Reep, as its member had benefitted disproportionately from the sales ban. “They have greatly increased their share of the market within our sample, and sold their cigarettes at hugely inflated prices.”

In December 2020, a Reep study found multinationals had lost between 10% and 14.4% market share, while local producers enjoyed market share gains of between 11% and 400%.

Individual companies’ share of cigarettes bought by survey respondents before, during, and after the sales ban

Source: Reep study, ‘Back to normal? Smoking and quitting behaviour in South Africa after the tobacco sales ban’, December 2020

Fita head Sinen Mnguni says the research by TJSA cannot be given credibility and accuses TJSA of being a front group for “Big Tobacco”.

“Until groups like Tax Justice South Africa play open cards and disclose who their funders are, their independence will continue to be questioned.”

The Reep study shows that cigarette prices went up an average of 5.8% after the ban was lifted.

Multinationals increased their prices by nearly 5%, compared with non-multinationals, which increased prices by 30%.

Pointing to the same Reep study relied on by TJSA, Mnguni says it shows the lowest average price of cigarettes was R23.60 for a pack of 20. “This suggests that the ultra-low-price cigarettes, which were a characteristic feature of the market before the lockdown, have largely disappeared. From a public health perspective this is good, because it will discourage cigarette use, especially among the poor sections of the population,” reads the Reep study.

Says Mnguni: “This is an independent study by Reep which contradicts TJSA’s claims based on anecdotal evidence of cigarettes being sold for less than R20 a pack.”

SA Tobacco Organisation questions TJSA’s integrity

A statement by another industry body, SA Tobacco Organisation (Sato), of which Gold Leaf Tobacco is the largest member, likewise questions the integrity of the TJSA Crimewatch documentary and says “there is no evidence to suggest the [scenes] have not been staged”.

“We have noted that Mr Yusuf Abramjee [TJSA’s founder] has repeatedly through the years defamed our member Gold Leaf Tobacco Company (GLTC),” says a statement issued on Thursday by Sato.

“His recurring theme, through his various forums over the years, makes it apparent that he is perpetuating a lie and targeting Gold Leaf Tobacco, seemingly at the instance (sic) of big tobacco. It is not difficult to see that the entire expose was a commercial for Big Tobacco.

“The show demonstrates Batsa [British American Tobacco SA] brands selling for R40-R50, whilst we were able to conduct a test purchase of a pack of 20 Rothman’s at R17.50 [a Batsa product]. These are matters which TJSA is silent on. Interestingly, TJSA is also silent on the much larger illicit industries, such as alcohol and fuel.”

Read: SA has the world’s biggest illegal tobacco trade: Batsa

And this from Sato: “We would like to invite all tobacco manufacturers, multinational and local, to open up [their] records for scrutiny by the public. We are confident that nearly all of the profits made by multinational players are being siphoned out of the South African economy, which amount to billions of rands, through complicated measures of profit-shifting and fancy royalty arrangements.

“These matters of such a serious nature, should be ventilated through our judicial system and investigated by the real law enforcers and not by speculative journalists.”

TJSA’s response

Replies TJSA founderAbramjee: “Fita’s response is a classic deflection tactic used to avoid having to explain why they and their members have been caught red-handed.

“Fita might claim their brands are in the clear but, as the report shows, two-thirds (23) of the 34 brands we bought at below the legal tax threshold (minimum collectible tax) were brands belonging to Fita members (15) or their breakaway partner Gold Leaf Tobacco Corporation (8).

“We bought Red & Black cigarettes, made by Fita member Afroberg, for just R7.20 a pack – a price that amounts to barely a third of the taxes that should have been paid on that pack (R20.01). A full list of the Fita brands sold at below MCT is contained in the report.

“This is industrial-scale tax evasion that is robbing South Africa of R8 billion a year. That’s enough money to vaccinate half of our population.

“Mr Mnguni should be investigating how his members’ products could possibly be selling at these blatantly criminal prices and robbing our nation of vital funds.”

Gold Leaf, says Sato, pays a steady R200 million to the SA fiscus each month. “Our member’s market share, as researched by independent researchers, confirms that our member’s sales are in conformity with [their] tax contributions, thereby rubbishing all and any allegations concerning any illicit activity of GLTC.”

Replying to Sato’s statement, TJSA says it “notes the libellous comments about our organisation and founder Yusuf Abramjee made by the spokesman for Sato, a body recently established as a front for its only member, [GLTC].

“TJSA stands by its independent investigation that showed eight brands belonging to GLTC being sold at prices below the MCT level. A full report, including hours of video footage, has been delivered to SA Police Service (Saps), SA Revenue Service (Sars) and the departments of finance, health and trade.

“TJSA would gladly accept Sato’s invitation to look at GLTC’s books to establish how their products are being sold at prices that suggest millions of rand are being evaded in tax.”

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.