Illicit Tobacco Trade Drains R20 Billion Annually from South Africa

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JEREMY MAGGS: South Africa’s G20 presidency brings significant expectations and substantial accountability. With challenges such as cross-border tax cooperation and combating illicit trade, the stakes have never been more critical. During a recent update, Foreign Relations Minister Ronald Lamola mentioned that we are entering what he describes as a phase of intentional leadership. However, the statistics reveal a more complex narrative.

Illicit financial flows, smuggling, and a thriving tobacco trade drain our resources and threaten our commitments to the Financial Action Task Force [FATF]. So, what is the real state of reform, and are we genuinely taking action or merely coasting along?

Economist Sifiso Skenjana holds strong views on this issue, and I’d like to explore where policy is making strides and where it may be falling short. Sifiso, welcome. The minister speaks of intentional leadership. Yet, with South Africa still grey-listed, can we interpret this as optimism concealing inaction?

SIFISO SKENJANA: Regarding the grey listing, Jeremy, we received feedback from the FATF last year about the action items we needed to address. In February, they updated us on certain areas where we had made advancements. This suggests that during the next announcement, expected at the end of June, we might see South Africa move off the grey list.

Nonetheless, there are still deficiencies in other areas needing attention regarding illicit trade. For example, South Africa is unique in being the only country where illicit cigarettes are readily available. We’re also seeing a rise in the illegal sale of alcohol.

There has been a reduction in illicit textile trade, but these challenges create an environment conducive to illicit financial flows and product distribution, subsequently presenting ongoing challenges to our FATF status concerning grey listing. However, based on their February feedback, it appears we have made some progress.

JEREMY MAGGS: Let’s dive deeper into tobacco. The statistic showing that 60% of the market is illicit is staggering. Does this mean the South African Revenue Service (SARS) is overwhelmed or inadequately equipped? Moreover, it seems the new tobacco bill does not address illicit trade adequately. Would it be fair to say it’s ineffective from the outset?

SIFISO SKENJANA: Yes, starting with SARS, they are indeed significantly under-resourced for this challenge. You may recall a court case where SARS attempted to install cameras in manufacturers’ facilities for compliance tracking. When they tried to conduct inspections, the manufacturers removed the cameras, arguing it would harm their competitive advantage.

Read: SARS loses its appeal to install cameras in tobacco factories

Clearly, they need to reassess their strategies. Conversely, the South African Bureau of Standards (SABS) could take a cue from Kenya’s advancements in tracking and tracing, using serial numbers printed on cigarette paper. This would significantly improve our ability to monitor financial flows from a revenue standpoint.

Currently, tobacco-related fiscal leakage is nearing R20 billion. Therefore, enhancing SARS’s capabilities and addressing the entire value chain are vital areas requiring reform.

Read: Illicit tobacco sales a drag on excise tax collections

Regarding the tobacco bill, one key issue is that while discussing sin goods, the focus heavily leans toward public health advocacy. This overemphasis can create a blind spot and overlook crucial dynamics in the industry.

Specifically, the bill fails to account for South Africa’s position as a hub for illicit trade. Thus, the legislation must include measures that address this reality.

I believe the bill fundamentally overlooks aspects that could curb illicit trading in South Africa, which may emerge as a significant issue if the bill moves forward.

JEREMY MAGGS: There’s also a revenue consideration to make. You argue that we’ve surpassed the Laffer Curve peak, yet the response seems to be persistent excise tax increases. Doesn’t this imply a lack of understanding or mere political maneuvering?

SIFISO SKENJANA: Yes, I believe it reflects both realities. Politically, it’s expected to tax sin products indefinitely without regard for market dynamics. This strategy risks leading the sector towards a decline due to excessive taxation without exploring alternative revenue models or recognizing that after reaching the Laffer Curve peak, additional tax increases can actually decrease sector growth.

In the tobacco industry, we’ve missed chances to thoroughly analyze what I call the “smoking economy,” especially with the rise of vaping and non-combustible products. Tax differentiation based on product risk is essential.

Read: Why a risk-based approach may be the best way to tax e-cigarettes

Therefore, policy should align taxation with the risk level associated with different products. The World Health Organization’s Article 14 emphasizes smoking cessation, which should guide a responsive tax regime as individuals transition to less harmful alternatives.

This evolution in the industry necessitates innovative thinking from the National Treasury to adapt to upcoming trends beyond just cigars and cigarettes, which could lead to enhanced revenue collection outcomes.

JEREMY MAGGS: Please respond swiftly, as we are running short on time. You suggest we’re at a tipping point. Are we there, and what are the serious economic consequences if we don’t take immediate action?

SIFISO SKENJANA: The economic consequences are significant; the illicit market could expand to cover 60% of the industry. This would render public health efforts ineffective. Ultimately, the potential revenue from this sector would diminish. We are indeed at a tipping point concerning public health and future revenue.

JEREMY MAGGS: Indeed, a warning has been issued. Thank you for your time, economist Sifiso Skenjana.

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