Smoke and mirrors: SA Revenue Service faces an uphill battle against illicit tobacco

Do a search on the word ‘tobacco’ on South African news sites and it quickly becomes evident that tobacco, and cigarettes, dominated the headlines for more than five months in 2020. 

This is unsurprising, given the government’s ban on the sale of tobacco products and alcohol to help manage the Covid-19 pandemic, to the frustration of most South Africans.

The ban on tobacco products and alcohol sales was lifted in mid-August, although in the case of alcohol it was only a partial lifting. 

However, the consequence of this was quickly felt on the fiscus. The recent Medium-Term Budget Policy Statement (MTBPS) revealed that the South African Revenue Service (SARS) would miss its revenue target by R312.8-billion this financial year due to the depressed performance of the major tax bases amid Covid-19 financial turmoil.

The pressure is now on SARS to improve collections.

“We know that the levels of compliance have been on a steady decline – and we are working hard to arrest that,” SARS Commissioner Edward Kieswetter told an online panel in early November.

He estimates that SARS could raise tens of billions in revenue, over and above that raised from taxes.

The Receiver will do this, he said, by becoming more efficient and tracking down individuals guilty of tax evasion, companies responsible for base erosion and profit shifting, and illicit activity in general. 

Which immediately raises questions about what SARS is doing to recoup the money lost on the illicit sale of tobacco products.

However, the commissioner is reluctant to talk specifically about excise taxes and what SARS is doing to ensure it earns its full dues from cigarette manufacturers. 

It’s conservatively estimated that R8-billion was diverted from SARS and into the illicit economy as a result of the ban on cigarette sales earlier in 2020. 

This makes one wonder why a SARS tender for a national track and trace system — which was cancelled in May as part of Kieswetter’s clean-up process — is not going to be reissued.

The tender was intended to replace the country’s outdated “Diamond Stamp” fiscal marking regime and replace it with key supply chain enhancements. 

This is consistent with recommendations made under the World Health Organisation’s Framework Convention on Tobacco Control and the Protocol on Illicit Trade in Tobacco (the Protocol).

“This new system would have dramatically improved the government’s efforts to address illicit tobacco trade, allowing officials to track cigarettes from their place of manufacture and trace them to the point where all taxes have been paid,” says Michael Eads, MD Sovereign Border Solutions and former executive for customs modernisation at SARS.

The smoking gun is the doing of nothing. Excise has been treated as a small contributor to overall collections and was left behind in the modernisation of SARS. To my mind this is intentional, it’s a case of don’t poke the bear.

In the most recent MTBPS, finance minister Tito Mboweni indicated that SARS’s budget would be trimmed rather than increased.

“When we look at the global research, over two-thirds of illicit tobacco is genuine product coming from transnational tobacco companies, so they’re continuing to be the key driver of this problem. The industry’s PR talks about counterfeit product and small manufacturers, but the issue continues to be that they are failing to control their own supply chain," says Allen Gallagher, research associate, Tobacco Control Research Group at the University of Bath and a partner in global tobacco watchdog STOP. "This is why Track and Trace is so important; the whole idea of that as a policy is a direct response to the industry’s failure to control its own supply chain.”