As South Africa prepares for finance minister Tito Mboweni’s medium-term budget speech this week, it is becoming increasingly clear that the country needs a new post-Covid-19 approach to the tobacco industry, says Zacharia Motsumi, spokesperson for the South Africa Tobacco Transformation Alliance.
The alliance represents approximately 11,000 tobacco farmers, processors and manufacturers across five growing provinces who are committed to supporting transformation in the industry.
Motsumi said that if drastic action is not taken soon, the more than 150 black tobacco farmers who are struggling to make a living in rural South Africa will soon go out of business.
He said that government’s ban on cigarettes sale during the coronavirus lockdown devastated the industry, after the legal sale of cigarettes and other tobacco products was banned for almost five months.
“But perhaps the biggest loser of all from the Covid-19 pandemic was the national fiscus. As a result of the lockdown, it is estimated that excise revenues for the current fiscal year will fall by 32%, while R13.7 billion in excise revenue will be lost to the illicit market,” he said.
“There can be absolutely no doubt who the biggest winners were, though: it was the shady characters who deal in illicit cigarettes. They were already making money hand over fist before Covid-19, but the lockdown was manna from heaven for them.”
Motsumi said that there are now two ways for government to increase excise revenue from the sale of tobacco products.
- Increased legal sales volumes; or
- Increase the excise on tobacco products.
Motsumi said that acting to increase sales will increase the amount of revenue, which will inturn keep the price of tobacco products at affordable levels.
The second option, however, will decrease the amount of legal tobacco products being sold and consequently decrease the amount of revenue. “It will also, we have no doubt, open up more and more space for illicit traders,” he said.
This means that option – not to increase excise on cigarettes, to keep the prices at current levels – is by far the best option, he said.
“This can be done by National Treasury not increasing excise now but adhering to its policy of 40% excise incidence for cigarettes.
“At the same time, law enforcement agencies must directly tackle the illicit trade in cigarettes which has heavily impacted our value chain. It is no secret that SARS is currently struggling with capacity to arrest and bring those guilty of illicit trade to book.”
To add ‘teeth’ to government’s efforts, the South Africa Tobacco Transformation Alliance proposes that National Treasury adopts a “minimum price level” (MPL) for cigarettes. which has had significant success in other parts of the world.
This would enable law enforcement agencies and consumers to recognise illegal cigarettes purely by how cheap they are – which is the most obvious sign that excise duties are not being paid, said Motsumi.
“For example, if Treasury adopts an MPL price point of R28 for all retail sales of cigarettes, any cigarettes sold below this price would clearly not be tax-compliant given the amount that needs to be paid in excise,” he said.
“As a result, law enforcement agencies can enforce immediately based on a strong legal foundation and consumers would get certainty about the legality of their purchase.”
Motsumi said that an MPL strategy would need to be supported by a deterrent criminal penalty regime which includes heavy fines and jailtime for traders who contravene the law.
This would allow law enforcement agencies to seize illicit cigarettes in the most efficient and effective way, based on in law, he said.