Stubbing out the illicit cigarette trade

TRADE MATTERS

STUBBING OUT THE ILLICIT CIGARETTE TRADE

Cigarettes are the world's most widely smuggled consumer product. This is due to the illicit industry’s high profit margins due to the non-payment of taxes, relative ease of production and movement and low detection rates and penalties. Approximately 23% of all cigarettes consumed in South Africa during 2016 were illicit, with the incidence exceeding 50% in certain channels.

Under-declaration and tax evasion is the biggest problem

Almost 90% of all illegal tobacco products in SA can be classified as tax-evaded or ‘Duty Not Paid’. This is product on which the correct amount of excise tax and VAT has not been paid as a result of rogue legal manufacturers failing to properly declare their production volumes (and thus tax payments) to government. Any product sold on the market priced below R17.85 should be deemed suspect and prompt further investigation.

Where does illegal tobacco come from?

The source of illegal tobacco products has changed significantly over the last three to four years. There has been a dramatic increase in locally manufactured, tax-evaded product, while product originating mainly from Zimbabwe but also other neighboring countries has declined.

Independently verified research indicates that almost 90% of illegal tobacco products found in the country today are produced domestically by some manufacturers that are based or have a presence in South Africa. The overwhelming majority of these illegal products are concentrated in a handful of brands manufactured by a small number of local tobacco manufacturers.

The impact of illegal tobacco

More than R27 billion in tax revenue has been lost to the illicit cigarette trade between 2010 and 2016 (around R4 billion per year). R 27 billion lost, which could have been used to fund much-needed infrastructure and services in South Africa.

Retailers impacted

Around 179,000 retailers across South Africa, most of which are small, informal, black-owned businesses, derive a significant amount of income from the sale of tobacco products. Of these outlets: • 39% are spaza/house shops; • 36% are convenience stores; • 16% are taverns; • 7% are grocery & liquor shops; and • 2% are forecourts. • 55% of these outlets are in the townships. The negative impact of illicit trade on the tobacco value chain, especially those which are semi-skilled and that are based in rural areas where employment opportunities are scarce, is of serious concern.

Funds organized crime

According to Interpol, it has been found that proceeds from illicit trade funds organised crime: Serious organised crime groups are at the epicenter of the illicit tobacco trade. Proceeds from illicit tobacco are used to fund drug smuggling, human trafficking and other serious crimes, blighting the safety of local communities in South Africa and supporting regional organised crime networks.