Illicit cigarette trade grows unabated despite Sars crackdown promise
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South Africa becomes first country in the world to allow an illegal cigarette brand to become top seller. Photo: AFP South Africa becomes first country in the world to allow an illegal cigarette brand to become top seller. Photo: AFP
JOHANNESBURG – The trade in illegal cigarettes has increased dramatically, despite promises of a crackdown from the South African Revenue Service (Sars), according to the latest Tobacco Market Study from research house Ipsos.
Cigarettes selling for less than the tax of R17.85 per pack owed to Sars have grown market share by more than 25 percent, from 33 percent to 42 percent in the informal market, in just three months.
According to a 2015 judgment, cigarettes that sell for below the minimum tax can be deemed as illicit.
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’s RG brand is now the top selling brand in South Africa overall, overtaking all legal brands. It sells for an average price of just R10 and is, therefore, clearly evading the R17.85 owed to Sars on each pack.
Gold Leaf Tobacco Corporation (GLTC) now represents 73 percent of the market for illegal cigarettes. It 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.
Second-fastest growing brand
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.
Ipsos’s research indicates that 95 percent of Best Tobacco’s sales are illicit.
Their prices are 73 percent cheaper than the reference price in the legal market used by Treasury to determine excise duties, and 44 percent cheaper than minimum taxes owed on each pack.
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, attended a briefing by Ipsos on the results of the second read and 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.”