There is room for a significant increase in excise duties on tobacco products, a University of Cape Town professor has told a tax indaba.
This is not only because smokers seem able to absorb higher prices but also because of the high cost of tobacco to society, Prof Corné van Walbeek during said during a discussion on sin taxes and illicit trade at the virtual tax indaba held on Wednesday by the SA Institute of Tax Professionals.
British American Tobacco, the largest manufacturer of cigarettes in SA, has, however, warned on its website against “large and sudden” tax increases saying they could result in tax revenues falling as smokers seek out cheaper, black market alternatives. It says it is not against increases in tobacco taxes but they must be manageable and preferably in line with inflation.
Fair Trade Independent Tobacco Association (Fita) chairman Sinen Mguni also warned of the same, and said it would also encourage smuggling from neighbouring countries.
Van Walbeek noted that most smokers continued to smoke during the Covid-19 lockdown ban on tobacco sales despite the huge markups on prices. This indicated that the tax on the product could be increased substantially.
Van Walbeek is director of UCT’s research unit on the economics of excisable products, which conducted research into the impact of the ban on the cigarette market.
The unit found that about 9% of smokers interviewed quit the habit because of the ban while others were willing to pay higher prices for cigarettes, which, in the case of the Western Cape and Northern Cape, represented markups of more 350% on normal prices, while in Gauteng, Mpumalanga and Limpopo the price increases were between 120% and 160%. At one point, prices were increasing daily by nearly 5%.
More cigarettes were exported to Namibia in that month than the country could smoke in a year, probably with the intention of smuggling them back in to SA
Van Walbeek said in a normal year, Sars collects about R25bn-R30bn from excise duty on alcohol, about R14bn from tobacco products, and about R3bn-R4bn from the sugar tax. The excise duty on a pack of cigarettes is R17.40.
He referred to the estimate that tobacco consumption costs society about R42bn a year compared to which the amount collected in excise duty was relatively small. This was a further justification for an increase in the tax.
He said that even before the lockdown it was clear that the excise duty was not being fully paid on about a third of all cigarettes sold. All cigarettes sold during the lockdown were obviously illicit and the smaller local cigarette producers had greatly increased their market share from about the 20% they held previously by expanding their presence in the informal market.
Sars commissioner Edward Kieswetter has expressed concern that smokers may have become firmly entrenched in the illicit economy and that it could take years for them to return to the formal market. He has estimated the revenue lost during the four-month ban on alcohol and cigarettes to be about R12bn.
Also participating in the discussion was Telita Snyckers, who has just released a book called Dirty Tobacco: Spies, Lies and Mega-Profits. She was an executive at Sars and for the past 10 years has acted as a consultant on illicit trade.
Snyckers agreed that excise taxes on products such as tobacco and alcohol should be easy money for Sars to collect, but only if SA has proper production controls in place to determine how many packs of cigarettes are produced. This is not the case now. There was weak supply chain security during the lockdown, which resulted in big gaps in terms of revenue collection.
The excise duty on cigarettes and alcohol is paid by the manufacturers, who often underdeclare their production volumes to reduce the amount of tax owed to Sars. “This is dead easy to do because Sars has no production controls in place at the manufacturers,” Snyckers said.
Another drawback is that Sars has not introduced a track and trace system by marking packs to indicate whether tax has been paid or not. It also needs to conduct more audits.
Another tactic to avoid paying the tax is to declare the product for export (with therefore no tax being due) and either not send it, or export it to a neighbouring country for re-export back to SA.
Snyckers noted that in May, SA exported more cigarettes than it had done at any point over the previous five years. More cigarettes were exported to Namibia in that month than the country could smoke in a year, probably with the intention of smuggling them back in to SA. The data shows that this oversupply was being driven by two multinational companies.
Snyckers said that globally there is an overwhelming amount of evidence showing that cigarette multinationals are also involved in supplying the illicit market, noting, “When it comes to the tobacco industry, criminality almost seems to be part of their DNA.”
Update: September 9 2020
This article has been updated with comment from British American Tobacco, and the Fair Trade Independent Tobacco Association.
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