Johannesburg - Research house Ipsos said on Tuesday that South Africa has become the first country in the world to allow an illegal cigarette brand to become a top seller, after Gold Leaf Tobacco’s RG brand became the top-selling brand in the country overall, overtaking all legal brands.
Ipsos' latest tobacco market study shows the trade in illegal cigarettes has increased dramatically despite promises of a crackdown from the South African Revenue Service (Sars).
Cigarettes selling for less than the tax of R17.85 per pack owed to Sars have grown market share by over 25 percent, from 33 percent to 42 percent in the informal market, in just three months.
RG cigarettes sell for an average price of just R10 and are therefore evading the R17.85 owed to Sars on each pack. A 2015 judgment found that cigarettes that are sold below the minimum tax can be deemed as illicit.
Ipsos said in a remarkable show of defiance, manufacturers of cigarettes selling below the minimum tax have expanded their distribution at the very same time as Sars has been promising to crack down.
Gold Leaf Tobacco Corporation (GLTC) now represents 73 percent of the market for illegal cigarettes and is on track to become the biggest tobacco company by sales volume in the country, especially if there is another tax increase on legal cigarettes in February 2019.
Ipsos said GLTC’s biggest challenger is Best Tobacco Company whose brand, Caesar, also retails for R10 on average and is now the second fastest growing cigarette brand in the country, after RG.
Its growth has been driven by its expansion into the Eastern Cape as Ipsos’s research indicates that 95 percent of Best Tobacco’s sales are illicit.
The latest Ipsos retail audit – conducted in September and October – is the second wave of a tracking study that was first run in May and June this year.
It audited a representative sample of 2,058 retail outlets twice in each wave, using a methodology that has been peer reviewed by local and international research experts and academics.
The research was commissioned by the Tobacco Institute of Southern Africa (TISA).
Professor Nicola Theron, managing director of Econex, said: "This is valuable research and should urgently inform government policy and action to clamp down on illegal cigarettes, to maximise government revenue via tax collection. The methodology appears sound and therefore the findings seem to be robust and conservative".
Ipsos said in the three months since the first wave, tobacco products below the minimum tax due have soared from 33.1 percent in June to 41.8 percent in the informal retail sector. This means that Sars is now losing at least R8 billion annually; up from R7 billion reported in the previous wave of the Ipsos study.
François van der Merwe, TISA chairman, said until the government is able to collect taxes from those who evade paying, it should think extremely carefully about increasing taxes again on the legal market.
“In these circumstances, another tax increase would be a betrayal of the 12,000 workers whose jobs depend on the legal tobacco sector. Worse still, it would send a message to South Africa that the government wants to discourage the consumption of tax-paid cigarettes, but is relatively relaxed about the consumption of illegal cigarettes," Van der Merwe said.
"Increasing taxes is easy, but not a solution. Rather, collecting taxes from those choosing not to pay is the best place to start."