Illicit cigarettes set fire to black tobacco

Unregulated products cost government estimated R20bn in tax revenue

A huge spike in the illicit cigarette trade has decimated the livelihoods and operations of black tobacco farmers, with many losing income and now exploring other avenues to survive.

The Black Tobacco Farmers’ Association (BTFA) told Business Times that at its peak, the tobacco industry had more than 150 black tobacco farmers, but the number has dwindled to a handful as they explore other crops for survival until there is certainty on the future of the South African tobacco industry.

“There are many tragedies here: black tobacco farmers have lost incomes, lost their possessions, all because of the rampaging illicit sector which, even with some interventions by law enforcement agencies such as the South African Revenue Service, continues to operate almost unchecked,” said BTFA chair Shadrack Sibisi.

“The reality is that the black tobacco farming sector is all but dead as a result of the encroachment of the illicit sector, which now makes up about 70% of the cigarette market. Many farmers — black and white — have left the sector and are now farming other products,” said Sibisi.

“As there is little certainty in the future of the tobacco market, black farmers have been forced to look at alternative crops. They are having some success there, but it is a tragedy that this takes place at a time when the government professes its commitment to the development of black farmers,” he added.

The tobacco industry blames the government for the situation, saying that it is not doing enough to curb illicit trading, which is growing at an alarming rate and has resulted in a R20bn tax loss to the fiscus.

The illegal trade escalated to unprecedented levels during the Covid-19 lockdown when the sale of tobacco products was banned. That eroded revenue for legitimate companies and tax contributions from the sector.

According to research by the University of Cape Town, the tobacco sales ban created a situation in which manufacturers/traders exclusively operated illegally for an extended period, giving them an opportunity to develop new and creative underground distribution channels, and making it hard to eradicate these avenues after the ban was lifted.

The report, which was published in May, found that had the government substantially increased the excise tax rather than banning the sale of tobacco products it would have achieved a similar public health outcome, received more revenue and prevented the growth of the illicit market.

“Both local and multinational tobacco companies have been accused of being involved in a variety of illegal activities in

South Africa, but when it comes to selling very cheap (and thus likely illicit) cigarettes, the non-multinationals have a substantially larger presence in the market,” the report reads.

“Unless the non-multinationals become more tax-compliant, either of their own volition or because they are monitored more closely by Sars, history suggests that the prevalence of cheap, untaxed cigarettes will increase when the market share of nonmultinationals increases. This may have negative implications for public health,” the report adds.

While the tobacco industry places the size of the illicit trade at 70% of the industry, researchers estimate it to be around 54%.

British American Tobacco (BAT) SA MD Johnny Moloto painted a bleak picture of the state of the industry.

He says the government doesn’t appear to have the political will to clamp down on illicit cigarettes, which have flooded the market, costing the fiscus R20bn a year and forcing his company to retrench more than 30% of its workforce.

Moloto said in the 2010 financial year, cigarette sales contributed R20bn in taxes but last year the figure was down to R8.9bn despite annual consumption remaining more or less constant at 32-billion sticks.

The excise loss translates into taxes on about 9.6-billion sticks, of which R7bn comes from BAT SA, whose sales have fallen 40%.

BAT SA said it had engaged National Treasury about the problem and suggested solutions.

It wants the government to ratify the international protocol on illicit trade and to implement a track-and-trace solution that has been effective in curbing illicit activity in Europe.

According to Moloto, inspectors were placed in local cigarette factories in December 2018 to monitor production and tax declaration, and after two months this was making a difference. Then they were removed and it was “back to business”.

Sinenhlanhla Mnguni, chair of the Fair Trade Independent Tobacco Association, said legitimate local tobacco industry roleplayers have over the years repeatedly voiced concerns about the exponential increase in the illicit tobacco trade and the smuggling of cigarettes from neighbouring countries, in particular from Zimbabwe via the Beitbridge border post.

The revenue of legitimate cigarette manufacturers has already been affected and, if this situation continues unchecked, the revenue collected on these products will more than likely plummet as the reward for noncompliance will be seen to outweigh compliance, he said.

“This is a growing reality and there seems to be no solution forthcoming from the relevant regulatory authorities,” he added.

Mnguni said FITA and its members support efforts by the state to implement compliance measures provided they are constitutional and free from industry interference.

“For a period of some 14 months, Sars implemented this policy of stationing officers inside each licensed cigarette manufacturing warehouse. All FITA members complied with this,” he said.

“While we do not wish to engage on the affairs of non-FITA members, we have for years highlighted the need for the public to view the acts of big tobacco with a degree of scepticism and objectivity given their past transgressions. It is a historically proven fact that multinationals ultimately have the single goal of protecting their bottom line, and leading academics and researchers are of the opinion that this could be one of those instances.”

Said Sibisi: “The truth is that the future of the entire tobacco industry, and in particular the remaining handful of black tobacco farmers, lies in the hands of the government.

“Unless it is able to act with determination against the criminal networks, and on a massive scale, the illicit sector will grow even further. More and more law-abiding farmers will go out of business and have to rely on the indignity of social grants; more tobacco company employees will lose their jobs; and consumers will have to rely on dubious products, manufactured by equally dubious people, for their daily smoke.”

The future of the industry, and in particular the remaining handful of black tobacco farmers, lies in government’s hands Shadrack Sibisi

Black Tobacco Farmers’ Association chair