Government must stub out illegal tobacco trade with track-and-trace tech, says JTI

The illicit tobacco trade is an intricate problem. There’s more to it than meets the eye because it’s often linked to much larger criminal syndicates as well as corruption, tax evasion and money laundering.

The illegal tobacco trade has become the third-largest “supplier” of tobacco in the world; the resulting loss of tax revenues around the globe is estimated to be $40bn (R599bn). This means that for every 1% that can be “taken back” from criminals, governments may effectively increase their revenue by $400m.

This loss of revenue has a domino effect, affecting the viability of otherwise law-abiding players in the tobacco industry. 

It’s become clear that the illicit tobacco trade is fuelled by affordability pressures on consumers, which is something that criminals continue to leverage.

It’s essential that the public become aware of the concealed risks of cheap illegal tobacco products. Often it’s impossible to know if these comply with health regulations.

The illicit tobacco trade being underregulated also harms small businesses and exposes underage children to cheap, backstreet tobacco products. Better enforcement and stiffer penalties are needed in this regard.

Criminals used lockdown ‘loopholes’

During the 2020 Covid-19 lockdown, when the legal sale and distribution of cigarettes were prohibited between risk-adjusted alert levels 3 to 5, SA experienced an unprecedented increase in the illicit tobacco trade.

The lockdown and tobacco ban were loopholes used by unlawful players to increase their distribution. Illicit tobacco is now estimated to account for 60% of the total market, dominating an informal sector that is unregulated by authorities.

While these suspect players were running to the bank, the legal industry, which pays its taxes, recorded a decline of almost 48%.

According to market research group Ipsos, the loss of excise tax and VAT to the SA Revenue Service (Sars) from the legal tobacco industry was about R7.2bn in 2020. This is a conservative figure and excludes any losses due to the growth of the illicit tobacco trade.

The losses to the fiscus seem set to continue if the issues of high sin taxes and the illicit tobacco trade are not addressed, and this comes at a time when the government needs revenue more than ever.

The minimum collectable tax for a pack of 20 cigarettes is R20.01; this means 44% of the price of every pack sold goes straight to the government in the form of excise tax excluding VAT.

For every illicit tobacco pack sold on the streets of SA, the government loses revenue that could have made a difference to service delivery. 

SA government must act

Governments take a leading role in the fight against the illicit tobacco trade. Without their support, industry efforts cannot be fully effective. 

Across the globe, Japan Tobacco International (JTI) is committed to complying with strict regulations and is working hard to implement solutions aimed at improving supply chain security. Through co-ordinated efforts with the government, we can begin to reduce the problem.

The SA government would benefit significantly from ratifying and localising the Protocol to Eliminate Illicit Trade in Tobacco Products under the WHO Framework Convention on Tobacco Control (FCTC), which came into force in 2018.

SA is a founding member of the FCTC; former health minister Dr Aaron Motsoaledi signed the protocol in Geneva in January 2013. 

It is concerning that, until today, the government has not ratified the protocol, which will allow for a globally aligned track-and-trace system which traces tobacco products from manufacturer to point of sale. 

In 2020, Sars introduced a regulation for the installation of digital counters at local manufacturing sites. This was a step in the right direction, but the system still relies on the transparency of manufacturers to provide a report on their production levels, which inadvertently presents a loophole.

JTI believes a full digital volume verification system would be the most effective and affordable solution. This would provide the government with the manufacturing data needed to curb under-declaration, which results in suspicious pricing and tax evasion.

Track-and-trace technology alone will not prevent illicit trading, but it will support law enforcement agencies and legitimate businesses in their efforts to reduce the problem.

Consistent audits by Sars need to continue, the seizure of illegal tobacco products must intensify, and law enforcement agencies need to work in a co-ordinated manner to increase the prosecution and closure of underhand operators.

The illicit tobacco trade undermines the government’s objectives and negatively affects legitimate retailers, while the manufacturers of illegal tobacco continue to operate untouched and criminalise the retailers that stock their products.

The licence to manufacture and trade tobacco comes with a sense of responsibility. Illegal players have shown that they do not appreciate this legal privilege, nor do they have any regard for the rule of law in SA.

This is a call to the government to act swiftly and stay true to its commitments to curb this pandemic in the tobacco industry before we have a 100% black market.

The current trajectory is surely unsustainable and unaffordable for the country.

This article was paid for by JTI.