As 2024 Budget shows, SA’s legal cigarette market continues to haemorrhage

The National Treasury’s recently released revenue figures indicate that South Africa’s legal cigarette market is continuing to shrink – a trend that started in 2008. In most countries a decrease in cigarette sales is a cause for celebration because it shows that fewer people are smoking and that remaining smokers are smoking less. However, in South Africa, we have no reason to celebrate the marked decline in legal cigarette sales.

Surveys indicate that smoking prevalence has remained roughly the same, and may have even increased, yet legal cigarette sales have decreased by nearly two-thirds since 2008. The reason: South Africa has been flooded by massive volumes of illicit cigarettes.

A soon-to-be published study conducted by colleagues in the Research Unit on the Economics of Excisable Products (REEP) at the University of Cape Town indicates that the illicit market comprised more than half the market in 2020, 2021 and 2022. The latest numbers from the National Treasury indicate that the illicit market has grown even more in 2023, and could well be larger than 60% of the total market.

The impact on the fiscus has been disastrous. In 2019, excise taxes on domestically produced cigarettes contributed R14-billion to the government coffers.

By 2023 the contribution of cigarette excise taxes decreased by 35% to R9-billion. If one accounts for inflation, real revenue from domestically produced cigarettes has decreased by more than 50% in the last four years.

Over the past decade or so, the excise taxes on both tobacco and alcohol have increased by similar percentages each year. In 2010 the excise tax revenue on cigarettes and cigarette tobacco was equal to more than 80% of the excise tax revenue received from all alcohol products.

By 2019, when the illicit cigarette market was already well established, this percentage had dropped to 48%. In 2023 it had dropped to 22%. Clearly, tobacco taxes are becoming an insignificant source of revenue for the government, despite smoking rates remaining high.

In the most recent Budget speech, Minister of Finance Enoch Godongwana announced a 4.7% increase in the excise tax on cigarettes, and somewhat higher increases in the excise tax on cigars and pipe tobacco. Each packet of 20 cigarettes now carries an excise tax of R21.77, up from R20.80 in the previous fiscal year.

The Treasury has a policy of increasing the excise tax on tobacco and alcohol by at least the inflation rate each year. They have been imposing this policy since the start of South Africa’s democracy, and should be commended for being consistent and predictable in applying this policy.

The National Treasury does not accept the industry’s argument that an increase in the excise tax causes an increase in the illicit market. Illicit trade is the result of criminal activity and should be handled as such.

However, given the scale of the illicit cigarette market, there is a need for stronger enforcement to monitor the supply side of the market for cigarettes.

Attempts by the South African Revenue Service (SARS) in 2014 and 2015 to rein in the illicit market yielded some gains, but these gains were lost when its specialised units tasked with monitoring illicit trade were shut down in 2015. Things improved slightly in 2019, when SARS was under new leadership and the Illicit Economy Unit was established.

However, this progress was undone when the government imposed an ill-considered ban on the sale of cigarettes during the Covid-19 pandemic in March 2020, which, despite much evidence that it was not preventing people from smoking, remained in effect until August 2020.

The sales ban was a massive boon for the illicit traders and allowed them to greatly expand their clientele and distribution networks. Many smokers who did not smoke obvious illicit brands before the sales ban, switched to illicit brands during the sales ban and never switched back, even after the sales ban was lifted.

Information in the public domain makes it impossible to determine how serious SARS is about addressing South Africa’s illicit trade problem. Placing Gold Leaf Tobacco Corporation (GLTC) under curatorship in August 2022 because of tax evasion was certainly a step in the right direction.

Winning the court case against the Fair-Trade Independent Tobacco Association, which allows SARS to place cameras in the production facilities of tobacco companies, is also a positive step.

However, despite these “wins”, the recently released numbers in the Budget Review indicate that SARS is losing the war against the illicit cigarette trade.

Despite many appeals by academics and civil society organisations, South Africa has not ratified the Protocol to Eliminate Illicit Trade in Tobacco Products.

The protocol is an international treaty which aims to eliminate all forms of illicit trade in tobacco products. Countries that ratify the protocol commit themselves to implement, among other things, licensing requirements for all producers in the tobacco supply chain, and a track-and-trace system to monitor the flows of tobacco products.

In a country where more than half of cigarettes sold are illicit, South Africa should be one of the first countries to ratify the protocol and implement its recommended policy measures. Yet there has been a reticence to do so.

In 2019 SARS put out a call for proposals for companies that are independent from the tobacco industry to tender for a track-and-trace system. After numerous extensions, the call was eventually withdrawn in 2020.

One cannot help but wonder: why would we not want to implement a system that allows revenue authorities to track tobacco products along the supply chain?

Until appropriate measures to reduce South Africa’s illicit tobacco trade problem are implemented, the government will continue to miss out on the opportunity to raise much-needed additional revenue and reduce tobacco consumption. DM

Prof Corné van Walbeek is the director of the Research Unit on the Economics of Excisable Products (REEP) at the University of Cape Town. Samantha Filby is a research officer at the same unit.