Massive headache for Kieswetter – R119 billion up in smoke

The South African government has lost an estimated R119 billion in excise and Value-Added Tax (VAT) revenue between 2002 and 2022 as a result of the country’s sprawling illicit cigarette market.

In 2022 alone, R15 billion was lost in excise revenue and R3 billion in VAT revenue.

This is according to a recent study by Nicole Vellios and Corné van Walbeek from the Research Unit on the Economics of Excisable Products at the University of Cape Town.

According to the study, the illicit cigarette market made up 5% of the cigarette market in the country in 2009. In 2022, it sat at 58%, a slight decrease from its peak of 60% in 2021.

In material terms, it is estimated that the annual total market in 2002 was 27.6 billion cigarette sticks consumed, rising to 33.7 billion sticks in 2022.

“The number of illicit sticks, defined as the gap between self-reported consumption and registered sales, was less than 5 billion from 2002 to 2012, after which it increased rapidly, reaching 19.7 billion sticks in 2021,” said Vellios and Walbeek.

The total revenue lost between 2002 and 2022, expressed in 2022 prices, amounted to R118.8 billion; over 92% came after 2010.

From 2002 to 2009, lost excise and VAT revenue accounted for less than R2 billion each year based on 2022 prices.

However, this changed after 2010, with lost excise and VAT showing significant increases.

From 2020, lost excise and VAT revenue exceeded R16 billion yearly, peaking at R17.9 billion in 2021.

The total revenue lost between 2002 and 2022, expressed in 2022 prices, amounted to R118.8 billion (R98.3 billion excise tax and R20.5 billion VAT).

Research indicates that illicit cigarette trade was ubiquitous during the COVID-19 cigarette sales ban, “and illicit trade has not decreased substantially since the ban was lifted in August 2020,” said the study.

Going forward

“In the context of a market with such a large illicit component, an increase in the excise tax becomes much less potent as a tobacco control tool,” they added.

It is argued that an increase in the excise tax would impact the price of legal cigarettes but leave the cost of illicit cigarettes unaffected – contributing to its further growth.  

“In the past few years, South Africa’s National Treasury has increased the excise tax by roughly the inflation rate [however they] may be waiting for the South African Revenue Service (SARS) to contain illicit trade, which, to date, SARS has not been able to do, despite some gains,” said the researchers.

Edward Kieswetter, the commissioner of the SARS, has said that “the country is battling the scourge of illicit cigarettes smuggled from a neighbouring country, intending not only to displace legitimate manufacturers but also to deprive fiscus of all taxes due.”

Recently, the Gauteng High Court granted SARS a notable win in its efforts to combat the illicit tobacco trade, enabling them to place CCTV surveillance systems within licensed customs and excise warehouses managed by tobacco companies.

The experts say that the World Health Organization’s (WHO) Protocol to Eliminate Illicit Trade in Tobacco Products provides decent guidelines for reducing illicit trade. However, South Africa has not yet ratified it.

“The Protocol commits governments to take effective steps to reduce the illicit trade in tobacco products, such as allowing only licensed manufacturers to produce cigarettes and implementing a track-and-trace system,” said Vellios and van Walbeek.

“If SARS does not secure the supply chain, South Africa will continue to lose valuable revenue,” they concluded.

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