The South African Revenue Service (Sars) was set to lose more than R7billion this year as almost 1.1million sticks of illicit cigarettes flood the South African market each day, according to the Tobacco Institute of Southern African (Tisa).

This estimated loss in tax comes against the backdrop of Sars’ under-collection of revenue being placed under close scrutiny at the ongoing inquiry into its tax administration and governance. Speaking at the release of a study into illicit trade in tobacco in South Africa, Tisa chairperson Francois van der Merwe yesterday said that illicit tobacco trade undermined the local tobacco industry.

He said Tisa had commissioned research firm Ipsos to conduct a study on the extent of illicit tobacco trade. The audit entailed a retail audit, which included visiting 4124 shops. However, it excluded mobile hawkers, taverns and shebeens.

Van der Merwe said companies selling a packet of 20 cigarettes for less than R17.85 were not paying all the taxes. He said the R17.85, which is made up of an excise duty and Value Added Tax, was the “absolute minimum” of tax payable on a packet of cigarettes.

“There is no manufacturing costs in there, no distribution costs, no margins for farmers, retailers, wholesalers and manufacturers. That is just tax. In our definition, if a packet sells for less than R17.85, it is illegal. We have a crime of tax evasion in this country,” he said.

Van der Merwe partly laid the blame for the booming illicit trade on Sars’ door after the taxman allegedly discontinued the so-called Honey Badger project in 2014. Honey Badger was dedicated to the investigation of the illicit tobacco trade.

Following Sars’ “crippling” of the project, there were no investigations into illicit tobacco trade, Van der Merwe said. “That is a sad story,” he said, adding that, until then, Tisa - whose members paid about R22.4bn in tax in 2014 - had good relations with Sars. But the relations soured, creating a perfect opportunity for illicit trade to flourish, he said.

Minimum tax

“Cigarettes selling at prices below the minimum tax owed to Sars, which is R17.85 per pack, were found in almost three out of four informal shops.

“As much as 33.4percent of cigarettes sold in non-organised trade are retailing below tax owed,” said Van der Merwe.

He said some of the brands sold packs for as low as R5, while 80percent of single sticks cost 50cents a stick.

Gold Leaf Tobacco Corporation accounted for 75.1percent of sales below the R17.85 per packet.

Gold Leaf distributes brands such as Voyager, RG, Chicago, Sahawi, Sharp and Savannah. Van der Merwe said RG, which typically sold for R10.50 per packet, was the second biggest cigarette brand in South Africa, behind Peter Stuyvesant.

“There is a sizeable market for brands sold at prices below the tax owed to Sars,” he said.

In its report, Ipsos said it had become difficult for retailers to compete if they did not stock the cheap brands.

“A combination of price and availability has enabled these brands to gain market share,” it said. Attempts to get comment from Gold Leaf were not successful.

Business Leadership South Africa (BLSA) yesterday called on Sars to immediately reinstate specialised units to clamp down on illegal cigarette sales. BLSA chief executive Bonang Mohale said the country’s R50bn revenue shortfall could not be attributed only to a slowdown in the economy.

Mohale said there was evidence of a “a man-made gap” created by lack of enforcement resulting from the corrupt decision to stop investigations and inspections of, among others, cigarette factories.

-BUSINESS REPORT