New research on illicit cigarettes is devastating news for the legal tobacco industry

Research which shows that almost 60% of retailers in South Africa are selling cigarettes below the tax-compliant price point of R25.05 for a pack of 20 is devastating news for the legal South African tobacco industry.

The research, published by Ipsos last week, provides compelling new information about the increasing availability of non-taxed cigarettes and the ongoing growth of the illicit tobacco sector.

It is just not possible to be tax-compliant and still sell a packet of 20 cigarettes at these low prices, given that the Minimum Collectible Tax (MCT) alone on these packets is R25.05. In fact, recent research commissioned by SATTA, as well as independent research from the University of Cape Town, shows that the minimum price at which a legal pack of 20 cigarettes can be sold is around R32.

These recent findings from Ipsos should increase concern about the future of the legal industry, and what it means for consumers and the national fiscus. SATTA believes we are close to the point where the legal industry is completely pushed out of the market and could collapse, leaving criminal networks completely in charge of cigarette manufacturing and sales.

That means no excise or VAT revenue from cigarettes for SARS. No contribution to the national fiscus. No work or income for people in the legal tobacco industry. And no access to legal products for South African consumers.

The criminals will have won.

SATTA therefore has no hesitation in backing the call by one of its members, British American Tobacco South Africa (BATSA), for Government to introduce a Minimum Retail Price for a packet of cigarettes. Such a move would empower law enforcement agencies to enforce at a retail level and also make it easier for consumers to identify illicit products.

Usual suspects

What is particularly disturbing about the Ipsos research, which has been conducted over multiple years, is the fact that the same manufacturers show up time and again as the ones producing large amounts of cigarettes on sale below MCT. This shows that these manufacturers cannot be running a loss leader strategy.

SATTA calls on all these manufacturers to explain to SARS and the public at large, exactly how they are able to grow tobacco, process it, manufacture cigarettes and distribute them, and pay excise tax and VAT – while the price of its products doesn’t even cover the cost of excise tax and VAT. Either they’re notspending anything on farming, processing, manufacturing and distribution … or they’re not paying taxes.

The situation is dire and needs urgent government attention and drastic interventions. National Treasury needs to step up to the plate and make more resources available to SARS. Without a change to the status quo, the legal industry will soon disappear from South Africa and the country will be one step closer to becoming a fully blown gangster state.