Edward Kieswetter kisses R24 billion goodbye

 ·30 May 2024

A Gauteng High Court ruling barring the South African Revenue Service (SARS) from installing CCTV cameras at tobacco-manufacturing warehouses is set to cost it billions in tax revenue.

South Africa has a booming illicit cigarette market where manufacturers and retailers do not pay excise and value-added tax (VAT).

The SA Tobacco Transformation Alliance (SATTA) estimated that the lost tax revenue from the illicit cigarette trade was at least R24 billion in 2023.

SATTA’s research showed that South Africans smoked 37 billion cigarettes last year. However, SARS only collected taxes on 13 billion.

The excise tax is around R1 per cigarette, which leaves South Africa with around R24 billion of lost tax revenue.

These figures align with Tax Justice South Africa’s Yusuf Abramjee’s estimates that as much as 70% to 80% of the cigarettes sold in South Africa are illicit.

He highlighted that the minimum collectable tax on a packet of 20 cigarettes is well above R20. However, many smaller shops sell these packs for as little as R10.

Tax Justice SA estimated that more than R20 billion in tax revenue was lost in 2022 due to the illegal tobacco trade.

With increased excise taxes, SATTA’s estimate of R24 billion in lost tax revenue from illicit cigarettes looks accurate.

To address this problem, SARS planned to install closed-circuit television (CCTV) cameras at cigarette manufacturers’ warehouses.

SARS wanted to use these CCTV cameras to monitor the volume of cigarettes they produce and clamp down on illicit cigarettes entering the market.

However, the Gauteng High Court in Pretoria stopped SARS’s CCTV plans in its tracks. Judge Linda Retief interdicted SARS from installing the cameras.

Retief’s ruling stated that there was no evidence that the cigarette manufacturers SARS was targeting weren’t tax compliant.

She added that the interdict against installing CCTV cameras would not prevent SARS from collecting tax.

This ruling will make it more difficult for SARS to clamp down on the illicit cigarette trade in South Africa.

Therefore, it is likely that SARS will continue to lose out on billions of tax revenue related to illegal cigarettes.

Wider illicit trade is an even bigger problem

SARS’s headache about lost tax revenue does not stop at the illicit cigarette trade. It extends to illicit alcohol, fishing, mining, counterfeit electronics, pharmaceuticals, food, and apparel.

The revenue service estimated that illicit trade costs the economy R100 billion annually and robs the country of valuable resources.

Business Unity South Africa (BUSA) said illicit trade is one of the biggest threats to South Africa’s stability and economic growth.

SARS Commissioner Edward Kieswetter highlighted that illicit trade costs South Africa R250 million daily.

Tax Justice South Africa’s Andy Mashaile said this is not a victimless crime. “Tax dodgers are robbing South Africans of schools, housing, healthcare, and basic safety,” he said.

Tax Justice South Africa said criminals have been allowed to thrive due to corruption and complacency.

Mashaile said problems of illicit trade and counterfeit goods go well beyond cigarette smuggling to dodge taxes.

There are many examples of counterfeit medicine and food that have resulted in South Africans’ deaths.

“Counterfeit baby formula which was manufactured in China killed 100 South African children,” he said. The fake milk formula had virtually no nutritional value.

“People will be shocked by the amount of money which is made from selling illicit products and shopkeepers not paying tax,” he said.

Read: SARS keeping an eye on international travel and high-end vehicles

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