A paper by South African economist Evan Blecher, now with the American Cancer Society, shows that by 2007, illicit trade accounted for up to seven per cent of the total market in South Africa.
However, the evidence shows that tobacco control policy has been successful and only partially undermined by illicit trade; consumption of tobacco products has continued declining while tax revenue has risen, thanks to sharply higher excise taxes.
The full report on pdf format (26 pages)
Source: FCA Bulletin number 94, page 4 (pdf format)
Since the early 1990s, South Africa has introduced significant tobacco control legislation.
In 1993, smoking was restricted on public transport, warning labels were introduced on packaging and advertising and sales restricted to people over 16 years old.
In 1999, smoking was banned in most public places, advertising and sponsorship and the distribution of free product was ended.
Since 1991, there have also been significant increases in excise taxes which have led to a large increase in the retail price of cigarettes.
The tobacco industry has long argued that high taxes are responsible for the growth in illicitly traded cigarettes because higher prices encourage cross-border smuggling, tax evasion on domestic production and brand piracy.
The Tobacco Institute of South Africa, which represents most tobacco growers and cigarette manufacturers, claims the illicit market amounts to 20 per cent of the total market. Yet no research has been published to substantiate this claim.
Evan Blecher estimated the total consumption of cigarettes in the country from national survey data on smoking prevalence and daily cigarette smoking rates. He then adjusted this data for the known ‘legal’ market to estimate the unknown ‘illicit’ market, a methodology similar to that used to measure indirect tax losses in the United Kingdom.
His conclusion is that the total size of the illicit market – up to seven per cent in 2007 – is much smaller than the tobacco industry has been claiming. He quotes data showing that legal cigarette consumption declined consistently until the early 2000s, attributed to higher excise taxes on cigarettes, after which consumption stabilised at about 24 billion sticks a year.
Smoking prevalence also declined consistently until 2002 after which it stabilised at about 24 per cent. The stabilisation in prevalence and consumption is attributed to the fact that tobacco excise taxes did not rise as sharply as in previous years.
Consumption taxes on cigarettes in South Africa comprise two separate taxes, a specific excise tax levied per packet of cigarettes as well as Value Added Tax (VAT) levied at a flat rate of 14 per cent. Even while losses in excise taxation grew significantly as illicit trade grew, so did total excise tax collections.
Between 1997 and 2007, total excise tax collections rose by over 123 per cent in real terms, dwarfing any loss through illicit trade. Blecher concludes that as taxes and prices have risen total consumption has fallen.
A small number of consumers have substituted their legal consumption with illicit consumption. But predictions that higher taxes would simply drive the industry underground have not come true.
The total market has declined in size by up to 20 per cent between 1997 and 2007, in spite of increases in illicit trade. It is likely that there are other reasons, in addition to higher excise taxes, which have encouraged the growth in illicit trade in South Africa.
Illegal traders in South Africa specialise in trade routes rather than commodities and a route can host a wide range of commodities over time, and several commodities at the same time.
For instance, routes between South Africa and China include illicit trade in abalone, clothes, electronics, drugs, guns, human beings and diamonds, in addition to cigarettes. The illicit trade in a number of commodities has been able to grow in South Africa as a result of large and highly effective organised crime syndicates.
This has been compounded by weak border controls and corruption. This conclusion supports the findings of other studies, including a February 2009 report by the influential South African Institute of Strategic Studies, which stated that, “cigarette smuggling continues to be a problem in the region. South Africa is a major market, as has been observed by the tobacco industry. Routes lead into the country through Botswana, Namibia and Swaziland. From the various interceptions by customs authorities, the cigarettes appear to originate from China and Zimbabwe. For various reasons, detection of cigarette smuggling tends to be low, and this activity is set to continue in 2009”.
Yet the illicit trade in cigarettes has declined since peaking at nearly 10 per cent of the total market in 2000. This may be a function of the spectacular decline in tobacco production in Zimbabwe where production levels have fallen by over 70 per cent since 2000.
In November 2006, South African Revenue Services (SARS) closed the operations of Mastermind Tobacco Company in a R57 million (US$7.2 million) fraud case. SARS had earlier charged employees and directors of the company with tax evasion and cigarette smuggling. This highlights that industry is not the innocent victim of smugglers but an active participant in illicit trade.
Numerous documents available on the internet also reveal BAT’s involvement with smuggling. Blecher concludes that the strategy of increased excise taxes to reduce cigarette consumption and increase government revenue has worked with dramatic effect, even in the face of the growth in illicit trade.
The illicit trade in cigarettes must be seen in the context of the growth in organised crime and cannot be solely attributed to high excise taxes.
REFERENCE Blecher, E., A Mountain or a Molehill: Is the Illicit Trade in Cigarettes Undermining Tobacco Control Policy in South Africa?, American Cancer Society.
evan.blecher@ cancer.org
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