Alarming rise of cheap, illicit cigarettes in SA shops

More than three-quarters of shops in SA sell illicit cigarettes, some for as low as R5 for a 20-pack.

An “alarming” new report by independent research house Ipsos shows that 76.7%, nearly triple the 27.4% seen in 2022, of South African retailers are now selling cigarettes below the minimum tax threshold.

The study, released on Tuesday, surveyed 4,812 retail outlets nationwide, purchasing the cheapest cigarettes available at each location. The research found:

• 69% of retailers were selling cigarettes below R20 per pack;
• 76.7% sold below the R26.22 Minimum Collectible Tax (MCT) threshold; and
• products as cheap as R5 per pack were discovered in some outlets.

It further showed that the illicit tobacco trade was “a home-grown problem” as locally manufactured brands dominate the market for products selling below MCT.

Gold Leaf Tobacco Company’s Chief brand was the most widely available cheapest brand, with 100% of products purchased at R26.22 and below. This is despite Gold Leaf Tobacco Company being placed under curatorship by Sars in 2022 due to its alleged involvement in illicit tobacco trade and tax noncompliance.

Our analysis indicates that the illicit cigarette trade costs South Africa about R28bn annually — R100m every working day — representing more revenue than Sars’s entire additional collection target

The rest of the top 20 cheapest brands are manufactured by South African manufacturers, except for the Remington Gold Zimbabwean variant and Manchester.

British American Tobacco South Africa (Batsa), which commissioned the study, said R28bn in annual tax revenue was lost to illicit trade, enough to exceed Sars' entire additional collection target of R20bn.

Batsa corporate and regulatory head Johnny Moloto said despite increased raids and product seizures over the past year, illicit cigarette availability continued growing, indicating current strategies are ineffective.

“With the clock ticking for Sars to collect at least an extra R20bn, these results from Ipsos show the need for immediate steps to plug the leaks in tobacco tax collection. Despite increased enforcement activity over the past year, including more raids and product seizures, illicit products remain as available as ever, suggesting that current tactics are failing to address the root causes of tax evasion,” he said.

“Our analysis indicates that the illicit cigarette trade costs South Africa about R28bn annually — R100m every working day — representing more revenue than Sars’s entire additional collection target. Eliminating this leakage would protect law-abiding taxpayers from bearing additional tax burdens.”

He said it was clear that current strategies to curb illicit tobacco sales were ineffective.

“We understand the resource constraints holding back the law enforcement agencies in our country and appreciate their attempts to clamp down on the illicit tobacco trade. However, the continued growth in the illicit tobacco trade, despite an increase in reports of interceptions and seizures, shows that the current approach is making no headway.

“There are a few relatively straightforward and cost-effective interventions that would have a significant impact. Deploying customs officials at factories, as was done successfully in 2019 before being discontinued, would ensure production volumes match quantities declared for tax purposes,” said Moloto.

Batsa also called for the urgent introduction into the Customs & Excise Act of a minimum retail price (MRP) of R37 per pack of 20 cigarettes, which is an economically viable price when considering all taxes and the lowest costs and margins in the legitimate supply chain.

“This would make it illegal to sell cigarettes below the MRP, providing law enforcement with a simple, effective tool to identify non-compliant products. Additionally, manufacturing licences should be revoked for companies found to be consistently under-declaring their production volumes or engaging in tax evasion.”

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