JTI calls for balance in tobacco excise increases to combat illicit trade in South Africa

At JTI, (Jt International South Africa (Pty) Ltd was founded in 1998. The company’s line of business includes the retail sale of cigarettes, cigars, tobacco), its believed that predictable and stable tobacco excise increases are necessary. Its also recognized that the products are subject to annual excise taxation by the government.

It is crucial that annual increases in excise be reasonable and consider the current market dynamics so as not to impact consumers. An excessive increase in excise puts significant pressure on an industry that is a major contributor to the South African economy.

The recent tobacco excise announcement made by Finance Minister Enoch Godongwana shows that National Treasury is aware of the market dynamics and the impact of illicit trade on the government.

Ahmad Ismail, a representative of JTI, says, “A much higher tax incidence on tobacco only fuels illegal tobacco trade and negatively impacts the legal tax-paying players who comply with the laws of the country.”

Unfortunately, the legal tobacco industry in South Africa contracted by 9.5% in 2022, while the growing illegal market now accounts for conservatively more than 55% of the total market, according to IPSOS research conducted in 2022. In 2019, the legal market size was 14 billion sticks, but in 2022 it now accounts for only 8.8 billion sticks.

When we consider consumption rates, the true size of the total market, including illicit products, is estimated at 33 billion sticks. Hence, we conservatively say that the illicit market is most likely beyond the 55% figure we see, and government revenue is falling by an estimated R9-10 billion annually.

Ismail adds, “The five-month ban on legal cigarette sales during COVID-19 resulted in a thriving illegal market, which cemented its distribution network. In 2022, we noted illicit cigarettes being sold commonly across the country for prices lower than the minimum collectible tax (excise & VAT) of R22.79/pack.”

“Research has shown that there are illicit brands in the market being sold for as low as R3.50/pack of 20,” says Ismail. “It is inexplicable how this has been allowed to continue under the watchful eye of the government. Surely at R3.50/pack of cigarettes, full due taxes are not being paid.”

JTI tested the constitutionality of the ban in South African courts, and on December 11, 2020, the Western Cape High Court ruled that regulation 45 of the Disaster Management Act, which pertained to cigarette prohibition, “cannot and does not withstand constitutional scrutiny.” The matter was taken under appeal to the SCA, and on June 14, 2022, that court ruled against the government.

This excise rate will allow the legal industry to stabilize its decline, but it is critical that the government continues to combat the illegal industry.

Unfortunately, the Ministry of Health is preparing to introduce to Parliament the Tobacco Products and Electronic Delivery Systems Control Bill. This policy does not meet our common objectives of preventing underage smoking but will fuel the already high levels of illicit tobacco and establish South Africa as a completely black market. This is a runaway train that will not be stopped unless the recommended sections of the Tobacco Bill are completely revised.

Now, we must urgently tackle pertinent actions around this highly regulated tobacco industry:

1. Ratification of the FCTC Protocol on Illicit Trade in Parliament

• Law enforcement in the retail environment, including policy development on establishing a legal, economically viable minimum selling price through the Customs Act. This will enable law enforcement to ensure compliance in the market.

• Prosecution and operations around the border on smuggled tobacco products. Non-compliant products are being openly sold in the market.

• SARS needs to reinstate the establishment of a digital tax