Crooks stub out tobacco industry
The government's failure to clamp down on the illicit cigarette trade is costing it between R8bn and R10bn a year and destroying SA's tobacco manufacturing industry, says Christo van Staden, MD of Limpopo Tobacco Processors (LTP)."This country's primary tobacco industry will be totally shut down within the next two years," he says, unless there is decisive action to curb illegal cigarette sales.The government "seems in no hurry" to do this, however. He suspects too many officials have a vested interest in the illicit cigarette business to want to end it.LTP, which is the only tobacco processing company in SA, buys all the tobacco produced by local farmers, and processes and sells it to British American Tobacco Southern Africa (Batsa).The local industry is entirely dependent on this relationship, but Batsa has given written notice to LTP that if its sales continue to fall as a result of illicit cigarettes it will have to consider buying offshore.In a letter sent to LTP in December, Batsa says its sales fell from 15.2-billion cigarettes in 2016 to 11.5-billion last year. It anticipates that this year, unless the government enforces the law against illegal cigarette makers, this will be down to 9.5-billion."Once Batsa's business declines like it is, it is not economically viable for them to maintain their local buying operation," says Van Staden.LTP buys from every farmer that produces tobacco in SA - 100 commercial and 150 emerging farmers in Limpopo, Mpumalanga and North West. In all, 90% of the 11,000 tons of tobacco they grow every year goes to Batsa."If Batsa decides to stop buying this tobacco it will undoubtedly mean the end of the primary tobacco industry in this country," Van Staden says.The jobs of 10,000 farmworkers with 35,000 dependants will be on the line, as well as those of 450 people who work for LTP.Van Staden wrote to finance minister Tito Mboweni in November last year, making him "totally aware" of the crisis. Other than an acknowledgement of receipt, he has had no response.He has also been in contact with the South African Revenue Service (Sars) through the Tobacco Institute of SA (Tisa), spelling out who the illicit cigarette companies are and what Sars needs to do to stop them.Under former Sars commissioner Tom Moyane, "nothing happened", he says."That's why all these corrupt companies are just continuing with business as usual. Flooding the market with very cheap cigarettes which they don't pay the excise duties on, which is why they can do it."A Tisa report shows a drastic increase in the illicit trade of cigarettes, and equally drastic decline in legal sales, from when Moyane took over at Sars in 2014. Under him its investigative and enforcement capacity was eviscerated. "That's why over the last four years we have seen this dramatic increase in illicit trade where people are selling a packet of cigarettes for R10."The minimum tax alone on a packet of "legal" cigarettes is R17.85."You can go to any town in SA and you'll find packets being sold for between R5 and R12," says Van Staden. "There's just no policing of that, they're not scared of the authorities at all."Market research company Ipsos says Gold Leaf Tobacco's RG brand is the top-selling cigarette brand in SA, having surpassed Peter Stuyvesant last year."That's why," says Van Staden.The Ipsos report shows that 75% of the RG brand is sold below the minimum tax level of R17.85.Tisa has been talking to the post-Moyane leadership at Sars since April 2018 about all of this, says Van Staden, "but it's just like nothing is happening. We know exactly what the problem is, we know exactly who the culprits are."It's amazing that with the amount of money the government is losing they're not stepping up action to stop this. They should just go into these facilities and stop the sale of these illegal cigarettes immediately."The tobacco for the illegal cigarettes comes mostly from Zimbabwe, either brought across the border without paying import duty, or stolen when tobacco trucks are hijacked in SA.The tobacco goes to factories that make the cigarettes but don't declare the product. "They sell it out the back door," Van Staden says. "No paperwork. That's why these crime syndicates are making billions of rands."If they don't declare sales, how do we know how much they're making or how much the government is losing?"The Ipsos report went into all these formal and informal markets and did a very extensive survey on the amount of cigarettes sold," he says.They came to a figure of around 32-billion cigarettes consumed in SA annually, with taxes paid on only 17-billion.This is why, according to Ipsos, the government is losing between R8bn and R10bn every year.Van Staden says he finds the government's failure to respond "just mind-blowing, given the state of the fiscus at the moment"."This should be a very easy way to rectify their huge debt. Just by going to these companies and stopping them."The lack of action makes him think "there is still massive corruption in government departments, and that's why people are not serious about tackling the problem. Because they have a vested interest in the illegal market."I'm very positive that lots of government officials are taking bribes. Sars and most of the prosecuting authorities are involved in this."In May last year, Tisa briefed parliament's standing committee on finance about the situation. The committee instructed Sars and the National Prosecuting Authority to investigate and take action.Since then, he says, there has been "no visible action"."We're losing faith and we're getting very desperate."He says he has urged Mboweni not to increase excise duties on cigarettes again when he delivers his budget next month, but believes this is precisely what will happen."All that will do is make the price difference even bigger between legal and illicit cigarettes. It will play straight into the hands of these companies. They're the only people who benefit from tax increases, certainly not the government."