Update on South Africa: Bans and Booming Illicit Trade, Exploiting Systemic Weaknesses

August 2020

By Telita Snyckers, Independent Illicit Trade Expert

In response to the coronavirus outbreak, South Africa introduced two highly contentious prohibitions, banning the sale of both alcohol and tobacco products. The impact has seen both a complete loss of all duties and taxes from these commodities, and a booming illicit trade.

Alcohol

During the first nine weeks of the lockdown, the South African alcohol industry lost R18 billion in revenue ($1 billion) and the government forfeited R3.4 billion ($190 million) in lost alcohol-related excise duties. Some smaller volumes of illicit alcohol sales were being made under the guise of ‘hand sanitisers’ and the like, while the legal mainstream industry suffered catastrophic losses.

Cigarettes

South Africa is losing an estimated R35 million (~$2 million) a day, in excise duties alone, to the illicit trade in cigarettes. Both mainstream and social media are positively riddled with anger at the government’s ban, which remained in place despite a number of court challenges, and which was finally lifted – along with the alcohol ban – in mid-August, when the country moved into a less restrictive lockdown phase.

The ban resulted in a substantial shift in the market share held by the various players. Whereas multinational tobacco companies completely overshadowed other manufacturers before the ban (holding around 77% of the legal market), they now control only around 9% of the black market, with the controversial Gold Leaf Tobacco controlling 26%, Carnilinx 14%, Best Tobacco 11%, and Amalgamated Tobacco 9%.

The booming illicit trade has highlighted the systemic weaknesses in South Africa’s control over excisable products, notably in respect of cigarettes. While the South African Revenue Service (SARS) had earlier announced the introduction of production counters, this has been delayed, potentially until January 2021. In the meantime, no apparent progress has been made in respect of the introduction of secure marking or traceability. With SARS having put the earlier track and trace tender on ice, it remains unclear what precisely SARS’ intentions are in the short to medium term, with SARS Commissioner Edward Kieswetter being quoted as saying, ‘this may or may not require track and trace.’

On top of this, export controls remain weak. With the tobacco ban hitting numerous industries particularly hard, the tobacco industry was fortunate to have been granted an exemption from the government, being allowed to continue producing cigarettes for the export market.

In 2019, South Africa exported 3.7 million kilograms of cigarettes to Namibia. Then in May 2020 – just before the lockdown – cigarette exports suddenly exploded, when South Africa exported 733,653 kilograms of cigarettes to Namibia in just one month. Namibians smoke on average around 729 million cigarettes a year. So, in one month, South Africa exported more cigarettes to Namibia than the entire country smokes in a year. This pattern is also evident for a number of other countries, and overall, in 2019, around 66% of South African cigarettes that were exported never made it to their final destination.

Purported ‘exports’ that were instead diverted to the local SA market are clearly not the sole driver of the black market, but are an important source. While the government shouldn’t be taking the focus off local manufacturing, tighter export controls are clearly needed. (SARS has a scanner at the Beitbridge border post between South Africa and Zimbabwe which saw volumes of illicit tobacco coming through that post dropping significantly. It does not appear to have a similar scanner at its border posts with Namibia, which might explain the vast volume of purported ‘exports’ being shipped to that country.)

Impact on revenue collection

Even before the lockdown, the government had cut its revenue projection for this fiscal year by more than R300 billion (~$17 billion) and had said that an additional R40 billion ($2.27 billion) in taxes needed to be raised over the next four years. This will have since worsened as a result of not only the broad economic impact of the coronavirus crisis, but also the more specific effect of the alcohol and tobacco ban.

The Bureau for Economic Research noted that the lockdown resulted in an under-recovery of tax revenue, relative to earlier expectations, of about R82 billion ($4.8 billion) for the 2020/21 fiscal year up to 15 July 2020. Excise duty collection fell by 42% year-on-year in the three months up to June and VAT, personal income and other taxes were also significantly lower. In all, total gross tax revenue was down by 23.6% year-on-year between April and June 2020.

This puts ever more pressure on a government that was already struggling to balance the books.

Other tender scandals

A factor that potentially complicates the introduction of any substantive solutions lies in the increase in tender scandals in the country, with government COVID-19 relief efforts having fallen prey to numerous allegations of capture and corruption. This puts any potential government tenders under ever more public and media scrutiny from an ethical perspective, and SARS in particular will want to ensure that whatever tenders it puts out can withstand close scrutiny, and avoid taking any steps that could potentially compromise its reputation any further. For the foreseeable future, this probably means a ‘slow-and-steady’ approach.

Conclusion

The booming illicit trade has brought the systemic weaknesses in South Africa’s excise management systems into sharp relief. But at the same time, the public has never been more invested in conversations around better managing the illicit trade in excisable products than it is now.

Of course, to do so requires both political will and funding. Historically, excise management was relegated to the bottom drawer, in large part because of its relatively small revenue contribution. But the time has probably never been better to start lobbying for an increase in government funding to improve compliance and enforcement efforts across the value chains of different excisable products.

More than ever, South Africa needs better production controls at source, it needs better traceability of consignments, it needs secure marking, and it needs stronger analytics capabilities.

If ever there was a time to make a concerted effort to push for production controls, secure marking and traceability in SA, it would be now.

Also in this issue:

  • New Marking Systems for Togo and DR Congo
  • TSTN is Going Online
  • New Tax Stamp Report Launching in September
  • Tax Stamps can Boost Government Finances in Post-COVID World, Says ITSA
  • Perum Peruri Responds to TSTN Article re Nepal Tender
  • ASPA and GS1 India Sign MoU
  • Perspectives on the WCO 2020 Illicit Trade Report: Tobacco

Other articles