British American Tobacco sees South Africa failing to meet tobacco excise revenue targets after a lengthy ban on the sale of the products swelled illegal sales.
The country will probably generate R11.5 billion ($791 million) in duties from cigarettes and related products in the year through March 2022, the company’s East & Southern Africa unit said in a presentation to lawmakers on Tuesday.
That compares with a National Treasury budget estimate of R13.1 billion.
Illegal sales make up more than 50% of the overall cigarette market in South Africa, according to BAT. Contraband sales will deprive the government of 19.1 billion in unpaid duties in the current fiscal year, it said.
South Africa outlawed the sale of tobacco for almost five months in 2020, one of the government’s more controversial measures to control the coronavirus pandemic. Yet smokers quickly found ways to source the products, fuelling the black market.
A University of Cape Town study found that 90% of smokers were able to purchase cigarettes during lockdown – typically at elevated prices.
Even before the ban, South Africa was one of the world’s biggest markets for illicit cigarette sales, according to a 2018 report published by the country’s producer-funded Tobacco Institute.
It could take years to reverse the impact of the criminal networks that sprung up and benefited from the ban, Edward Kieswetter, the commissioner of the country’s tax agency, said last year.
The government also raised excise duties on cigarette and tobacco products by 8% in late February, triggering a 9% increase in legal retail prices but a cut on the illicit market, BAT said.
The levy means the excise incidence on the most popular price category of cigarettes is now at 45%, compared with the National Treasury’s targeted incidence of 40%, Johnny Moloto, the general manager of BAT South Africa, said in a separate written submission to lawmakers.
“It is apparent that in setting the excise rate, the honourable minister of finance did not fully take into account or at all, the impact of the unprecedented five months ban on cigarette trading in the prior year, which extensively destabilized South Africa’s cigarette industry,” he said.