South Africa’s $510 Million Loss in the Cigarette Tax

South Africa is among the world’s largest markets for illicit cigarette sales. According to a report by the country’s Tobacco Institute, about 7 billion rand (equivalent to $510 million) a year is lost due to related tax evasion.

Although the country has made efforts to prevent cigarette smuggling from neighboring countries like Zimbabwe, in order to minimize the growth of an informal industry, South Africa has experienced an increase in production by domestic manufactures, but the products are sold through informal means. According to the Tobacco Institute, domestic manufacturers can sell cigarettes through informal convenience stores called spaza shops. At spaza shops, cigarettes can be sold at below the minimum tax rate charged by the South African Revenue Service.

“Taxes of at least 17.85 rand have to be paid on every pack of cigarettes in South Africa,” Chairman Tobacco Institute Chairman Francois Van der Merwe claimed in an interview on Thursday. “Meanwhile, smokers can pick up cigarettes for as little as 5 rand for 20 sticks, which clearly shows that taxes are not being paid.”

Additionally, domestic manufactures have engaged in counterfeit cigarette production. In South Africa, more than 75 percent of the cut-price cigarettes are made by Gold Leaf Tobacco Corp. Gold Leaf doesn’t participate in tax evasion and all allegations that the company does participate in such activities have been proven false. However, counterfeits of the Gold Leaf products are being produced in large quantities which is worsening the problem. As a result, there has been a significant loss in cigarette taxes which is contributing to a wider shortfall in South Africa. The loss has been estimated by the Treasury to increase to 48.2 billion rand for the year through March.

Image Via Flickr/Cha-Ching

“Informal traders buy these counterfeit or smuggled products in large quantities,” he said. “They then average out the prices across all packages of cigarettes which may very well equate to less than the minimum taxes due.”

The loss in cigarette tax has also affected employment. The largest cigarette maker operating in South African, BAT, claims it pays 20 rand in taxes per packet and has been struggling with competing with the informal sector so the London-based company has been cutting jobs to minimize its losses. Additionally, BAT’s manufacturing plant is now operating below 50 percent capacity. “Almost 400 jobs have been lost at the factory alone since 2014 due to the growth in illicit trade,” said Ronan Barry, BAT’s head of legal affairs.

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