South Africa is possibly the world’s largest black market for cigarettes

An investigation by corruption-busting group Tax Justice SA (TJSA) has found that two of every three cigarettes sold in SA are illicit, making SA possibly the world’s largest black market for cigarettes.

“Tax Justice South Africa conducted this research to document on film, and establish beyond debate, the degree to which the sale of illicit branded cigarettes – a trade that costs South Africans billions of rand a year in unpaid tax – is now open and endemic nationwide in the wake of the Covid-19 lockdown.”

The group said it considers all cigarettes sold at R25 a pack or below to be illicit, since such a price cannot possibly cover the cost of manufacture and distribution on top of the minimum collectible tax (MCT) of R20.01 due on each pack (R17.40 excise plus R2.61 Vat).

However, it said, for the avoidance of doubt, a far lower threshold of R20.00 – below the actual MCT – was adopted for this study.

A TJSA researcher visited 43 retail outlets in Cape Town, Johannesburg, Pretoria, and Durban; and in all but one of these outlets was able to buy cigarettes for less than R20 a pack, forming the basis of a video documentary (below).

“Our researcher was able to simply walk in off the street as an unknown customer and purchase cigarettes at R20.00 or below in 42 of the 43 outlets visited over the course of six days across all four cities, recording every buy on video… Some cartons were being sold at barely a third of the price necessary to cover tax alone.”

Furious reactions

The government placed a ban on all cigarette sales on March 27, 2020 to help slow the spread of Covid-19, but a study by University of Cape Town’s Research Unit on the Economics of Excisable Products (REEP) found that at the height of the ban, 93% of smokers were able to buy on the black market.

The Fair-Trade Independent Tobacco Association (FITA) instituted legal action against the government late last year in an effort to have the ban lifted.

This was ironic, noted REEP, as its members had benefited disproportionately from the sales ban, thesouthafrican previously reported.

“They have greatly increased their share of the market within our sample, and sold their cigarettes at hugely inflated prices.”

The REEP study in July 2020 showed that market share by multinational tobacco companies (British American Tobacco, Philip Morris International, Japan Tobacco International and Imperial Tobacco) had collapsed from 74% to just 17%.

TJSA points the finger of blame at members of the Fair-Trade Independent Tobacco Association (FITA), and Gold Leaf Tobacco Corporation which recently broke away from FITA.

FITA head Sinen Mnguni says the research by TJSA cannot be credible and accuses the group of being a front group for “Big Tobacco,” Moneyweb reported.

“Until groups like Tax Justice South Africa play open cards and disclose who their funders are, their independence will continue to be questioned.”

Reacting to the TJSA report, the SA Tobacco Organisation (SATO), of which Gold Leaf Tobacco is the largest member, also questioned the “integrity” of the TJSA report/documentary.

“There is no evidence to suggest the [scenes] have not been staged… We have noted that Mr. Yusuf Abramjee [TJSA’s founder] has repeatedly through the years defamed our member Gold Leaf Tobacco Company (GLTC),” Moneyweb reported citing a SATO statement released Thursday.

“His recurring theme, through his various forums over the years, makes it apparent that he is perpetuating a lie and targeting Gold Leaf Tobacco, seemingly at the instance (sic) of big tobacco. It is not difficult to see that the entire expose was a commercial for Big Tobacco,” the reported statement further alleged.

Industrial-scale tax evasion

FITA’s response is a classic deflection tactic used to avoid having to explain why they and their members have been caught red-handed, countered TJSA founder member Abramjee.

“FITA might claim their brands are in the clear but, as the report shows, two-thirds (23) of the 34 brands we bought at below the legal tax threshold (minimum collectible tax-MCT) were brands belonging to Fita members (15) or their breakaway partner Gold Leaf Tobacco Corporation (8).”

“We bought Red & Black cigarettes, made by FITA member Afroberg, for just R7.20 a pack – a price that amounts to barely a third of the taxes that should have been paid on that pack (R20.01).”

A full list of the FITA brands sold at below MCT is contained in the report, Abramjee added.

Image: taxjusticesa.co.za/investigation/

SATO said it’s challenging all tobacco manufacturers, multinational and local, to open up [their] records for scrutiny by the public. We are confident that nearly all of the “profits made by multinational players are being siphoned out of the South African economy, which amounts to billions of rands, through complicated measures of profit-shifting and fancy royalty arrangements.”

“TJSA would gladly accept Sato’s invitation to look at GLTC’s books to establish how their products are being sold at prices that suggest millions of rand are being evaded in tax,” Moneyweb reported Abramjee saying in response.

“Mr. Mnguni should be investigating how his members’ products could possibly be selling at these blatantly criminal prices and robbing our nation of vital funds,” Amramjee added.

“This is industrial-scale tax evasion that is robbing South Africa of R8 billion a year. That’s enough money to vaccinate half of our population.”

He said TJSA stands by its independent investigation that showed eight brands belonging to GLTC being sold at prices below the MCT level.

“A full report, including hours of video footage, has been delivered to SA Police Service (Saps), SA Revenue Service (Sars) and the departments of finance, health, and trade.”

“Illicit cigarette manufacturers are in our view stealing the country’s money and future by dodging their tax responsibilities and SARS is failing to act to prevent the manufacture, supply, and open sale of these brands on our streets,” the TJSA report stated.

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