S. Africa Losing $510 Million in Cigarette Tax, Report Says

(Bloomberg) -- South Africa has become one of the world’s biggest markets for illicit cigarette sales and is losing about 7 billion rand ($510 million) a year through related tax evasion, according to a report published by the country’s producer-funded Tobacco Institute.

While Africa’s most industrialized economy has long struggled to prevent cigarettes being smuggled from neighboring Zimbabwe, domestic manufacturers are now increasing production, according to Tobacco Institute Chairman Francois Van der Merwe. They then sell packets through informal convenience stores, known as spaza shops, at below the minimum tax rate charged by the South African Revenue Service, he said.

“Taxes of at least 17.85 rand have to be paid on every pack of cigarettes in South Africa,” Van der Merwe said in an interview ahead of the report’s publication Thursday. “Meanwhile, smokers can pick up cigarettes for as little as 5 rand for 20 sticks, which clearly shows that taxes are not being paid.”

Jobs Lost

The cigarette tax loss may have contributed to a wider shortfall in South Africa, estimated at by the Treasury at 48.2 billion rand for the year through March.

More than 75 percent of the cut-price cigarettes are made by Gold Leaf Tobacco Corp., according to the report. Its RG brand, the second-most popular in the country behind British American Tobacco Plc’s Peter Stuyvesant, is selling at an average of 10.50 rand a pack, said Van der Merwe.

Gold Leaf doesn’t evade taxes and allegations against the company in the report are false, Raees Saint, the company’s attorney, said in an emailed response to questions. Counterfeits of Gold Leaf products are being made in Lesotho and smuggled into South Africa, which may be the cause of the problem, he added.

“Informal traders buy these counterfeit or smuggled products in large quantities,” he said. “They then average out the prices across all packages of cigarettes which may very well equate to less than the minimum taxes due.”

BAT, the largest cigarette maker operating in South Africa and a member of the Tobacco Institute, says it pays around 20 rand in taxes per packet and has been cutting jobs as the London-based company struggles to deal with the rogue competition.

“The problem is significant in terms of how readily available these illegal cigarettes are,” Ronan Barry, BAT’s head of legal affairs, said in the same interview.

The company’s manufacturing plant south of Johannesburg is operating below 50 percent capacity and “almost 400 jobs have been lost at the factory alone since 2014 due to the growth in illicit trade,” he said.

©2018 Bloomberg L.P.