Illicit tobacco robs the fiscus of billions

In the 1990s and early 2000s, South Africa was regarded as a leader in tobacco control policy. Large excise tax increases, which made cigarettes much less affordable, were complemented by bans on tobacco advertising and smoking in public spaces. These measures led to a substantial decline in smoking rates. In parallel, inflation-adjusted government revenue from tobacco taxes more than tripled.

That progress has been squandered in the past 15 years. Today, more than half of all cigarettes consumed in South Africa are illicit (sold without the required excise taxes being paid). The easy access to cheap illicit cigarettes has resulted in smoking prevalence increasing from less than 20% in the early 2010s to 24% in 2021, the latest year for which we have nationally representative data. Each year the state loses billions of rands in revenue.

Illicit trade takes various forms, including smuggling, counterfeiting and tax evasion. In South Africa, the illicit cigarette trade is primarily driven by companies intentionally evading tax. Many under-declare production, enabling them to sell their cigarettes at prices far below the tax-inclusive minimum.

Our research over the past decade shows the rise of the illicit market coincided with the actions of smaller local cigarette manufacturers whose prices were so low they could not possibly have paid the full excise tax.

The trade in illicit cigarettes gained significant momentum after 2014, when the former commissioner of the South African Revenue Service (Sars), Tom Moyane, with the support of British American Tobacco, weakened Sars from within by dismantling units that had been created to monitor and curb illicit trade. The removal of the units enabled tobacco companies to evade excise taxes without fear of accountability. By 2017, illicit cigarettes captured more than a third of the total cigarette market.

The 2020 sales ban during the Covid lockdown made matters worse. We found, through online surveys, that most smokers did not quit during the 20-week prohibition. Instead, they bought cigarettes from informal sellers, often at inflated prices. The ban destroyed brand loyalties as people were willing to buy whatever was available.

When the sales ban was lifted in August 2020, many consumers stayed with their new brands, most of which are cheap and illicit. By 2021, about 60% of all cigarettes consumed in South Africa were illicit, and that figure has not come down.

The loss to the public purse is staggering. In a recent study with conservative assumptions, we estimated the government lost about R15bn in excise revenue each year between 2020 and 2022. Cumulatively, the total loss since 2022 exceeds R100bn.

But illicit trade is not only a fiscal issue. It is also a public health problem. The widespread availability of cheap, untaxed cigarettes encourages people who otherwise might not have smoked. That will increase the burden on the department of health in the coming years as these people develop tobacco-related diseases. The profits made by the tobacco industry, in both legal and illicit markets, come at the expense of society.

The tobacco industry typically argues that high taxes are to blame for the growth of illicit trade. This convenient narrative isn’t supported by international or local evidence. Countries such as the UK and Australia have much higher tobacco taxes than South Africa, yet their illicit markets remain small due to strong enforcement and effective supply chain controls.

In South Africa, the industry’s argument is particularly self-serving. Between 1994 and 2009, when illicit trade in our country remained relatively stable, excise taxes were increasing at an average rate of 10% above the inflation rate each year. However, between 2010 and 2021, when illicit trade surged, excise taxes grew by less than 2% above the inflation rate per year, on average. That clearly undermines the industry’s claim that high taxes drive illicit trade. The real issue lies in criminality amid weak enforcement and poor supply chain management.

Amid the illicit trade, the oversight by Sars is weak and was weakened further when the high court in Pretoria prohibited it from implementing CCTV cameras in tobacco factories and warehouses.

There have been isolated victories, such as Sars placing Gold Leaf Tobacco Corporation under curatorship in 2022. But these actions are piecemeal.

South Africa has yet to ratify the World Health Organisation’s protocol to eliminate illicit trade in tobacco products, despite having one of the highest such rates. If the government ratifies the protocol, it will commit to implementing robust supply chain controls, including the licensing of all actors and a digital track-and-trace system.

In 2019, Sars called for tenders to establish such a system, but this initiative was inexplicably withdrawn a year later, and the reasons were never clarified. Since then, the situation has only worsened. The longer the government delays dealing with illicit trade, the more deeply entrenched that market becomes, making efforts to curb it ever more challenging.

Two decades ago, South Africa showed that tobacco taxation could improve public health and strengthen the fiscus. That achievement has been undone by an industry that has capitalised on regulatory weakness and profited from illegality. Unless enforcement is strengthened and the government acts against those driving the illicit market, the country will continue to lose billions of rands each year.

Illicit cigarettes do not fall from the sky. They are manufactured, distributed and profited from by tobacco companies, most of which are based in South Africa. These companies not only undermine government revenue but also add to the rising burden of tobacco-related diseases. They profit while the fiscus and the health-care system pay the price

• Professor Van Walbeek is director of the research unit on the economics of excisable products at the University of Cape Town. Filby is a research officer at REEP.

• This article is based on a Special Communication by the two writers and was published in Tobacco Control as "Tobacco tax policy in South Africa: What went wrong and lessons for other countries".