South Africa, although hailed as one of the most prosperous economies on the African continent, remains a country of missed opportunities. The International Monetary Fund (IMF) once again made this clear in its consultations with the Treasury, urging the government to implement reforms to tackle weak growth as well as deteriorating fiscal and debt positions.
The IMF’s assessment is a slap in the face of president Cyril Ramaphosa, who came to power with promises of deep changes to the way the country is run and economic prosperity to all. Especially vexing is the growing debt-load and falling tax-base, both symptoms of a pervasive problem that continues to this day: illicit trade, especially in cigarettes, with the result that billions of Rand in tax revenue are lost to public coffers every year.
Illegal cigarette trade caused a loss of 6 billion in the 2015/2016 financial year, estimates the Institute for Security Studies in a recent report. At the same time, raids around Christmas recovered 3000 boxes of illicit cigarettes in Makhado province and worth 2.2 million in Limpopo province. The scale of these events makes it clear that trade in illicit smokes is running out of control – and that current means of cracking down on individual smugglers are not enough to stem the tide.
Indeed, the systemic nature of this problem has led the share of illicit smokes in the market to be a staggering 30-40%. What makes these numbers even more shocking is the fact that Big Tobacco itself is complicit in encouraging illicit trade. Through an network of front groups , the industry has used every trick in the book from sponsoring misleading health studies to misinformation campaigns for opposing any government regulation hoping to combat this menace.
For example, since 2018 the tobacco lobby has been using a combination of these tactics to impede the introduction of the Control of Tobacco Products and Electronic Delivery Systems bill. The industry’s ulterior motive in opposing this bill was to prevent the implementation of a traceability system to monitor all tobacco products along the supply chain by placing a secure identification marker on them.
A stipulation of the World Health Organisation’s Framework Convention on Tobacco Control (WHO FCTC) to which South Africa is a signatory, this system can prevent under-reporting of production, increase industry’s tax compliance and facilitate the crackdown on the black-market network. Recognising its benefits and urgency in controlling illicit trade, South African Revenue Service (SARS) announced the tender for this bill in 2019. This would replace the ineffective diamond stamping system being used in South Africa.
While this is a step in the right direction, for this system to be effective the WHO FCTC specifies that it needs to be free from industry influence. However, as experiences in other countries have shown, tobacco giants are keen on pushing their own system to monitor the tobacco supply chain. The WHO has called out the industry-peddled solution for being a Trojan horse, given that it does not use an open-source system and makes use of security features tobacco companies are aware of.
Big Tobacco’s smokescreen
This hasn’t stopped tobacco majors from undermining the SARS tender at any opportunity. Using false reports and spreading misleading information, the Tobacco Institute of South Africa (TISA) – a front company for multinationals like Philip Morris International and British American Tobacco – is attempting to pick holes in SARS’ proposal. These efforts are in tune with the global agenda of tobacco giants who, for obvious reasons, do not want such a full-proof system to be implemented.
Several researchers have pointed out that by deliberately overproducing in certain markets and oversupplying in others, tobacco giants are facilitating smuggling of their products across borders. But by propagating the narrative that the illicit trade problem is a product of smaller tobacco companies and smugglers, TISA is trying to negate the urgency of implementing the proposed monitoring system. TISA even went so far as to issue a press statement characterizing the system as complicated and expensive to implement for individual retailers.
Unfortunately, this line of argument is falling on fertile ground among retailers, but it is also a blatant lie. In reality, the unique identification marker will be put on the products in the production environment, meaning no individual retailer will be impacted by this.
Perhaps the most elaborate effort to discourage the adoption of the traceability system and other regulations was the launch of a highly misleading campaign called Take Back the Tax – funded courtesy of the TISA. This campaign was propitiously timed with the Department of Health’s 2019 bill and, clearly banking on popular shrill popular appeal, featured several celebrities promoting slogans such as ‘VAT doesn’t have to increase if we take back our R7-billion’ and the #takebackthetax hashtag.
South Africa’s chance
Considering the massive effort the tobacco industry invests into preventing an independent track and trace system from being implemented, the biggest challenge for SARS will be to resist being strong armed by the tobacco producers. Deploying an independent system is the only way to ensure higher tax revenues on tobacco products – tax revenues so desperately needed to lift the economy out of its seemingly eternal slump.