The SA Revenue Service (Sars) is preparing for war against tobacco companies and industry bodies, a fight determined to control a planned system to track and trace illicit cigarettes.
Sars has come under fire for pushing for a system that fights illicit tobacco manufacturing, initially temporarily withdrawing a tender for “further consideration” after apparent pressure from manufacturers. The tender, which was to close on August 30, will now close on October 31.
Tobacco economists estimate tax evasion by manufacturers costs the country R5bn annually. To combat this loss, Sars is looking at the best practices with regards to track-and-trace systems in Africa and Europe. Among the systems are those used by the Kenyan Revenue Authority (KRA).
The KRA has compelled that country’s tobacco manufacturers to install a special label, which includes a QR code, on to every cigarette box. When scanned, details of the product’s manufacturing cycle are provided.
BAT SA questioned the rush and need to impose a system that has not yet been proven to work on manufacturers.
But British American Tobacco (BAT), which manufactures cigarettes in that country as well as in SA, claims the label has not achieved what it set out to do.
As in Kenya, BAT is worried Sars will force a similar system, operated by a single supplier, on to SA’s tobacco manufacturers.
It’s a view local tobacco manufacturers and SA’s tobacco industry bodies Tisa (Tobacco Institute of Southern Africa) and Fita (Fair Trade Independent Tobacco Association) support to varying degrees.
Fita represents local manufacturers, while Tisa represents multinationals.
Victoria Kaigai – who works in BAT Kenya’s anti-illicit division – said that despite the track-and-trace system, illicit manufacturing had increased.
“In 2015, 3% of the tobacco products on the market were illicitly manufactured. In 2018 that figure rose to 33%,” she claimed.
What drives BAT SA’s concerns around Sars’ planned system is that it’s an eight-year contract, which could see manufacturers and the company that wins the tender later being forced to change systems once the World Health Organisation’s Protocol to Eliminate Illicit Trade in Tobacco Products, which SA is a signatory to, is ratified in 2023.
The protocol provides international measures that governments must take to combat illicit tobacco manufacturing in their countries.
BAT SA spokesperson Mandlakazi Mphahlwa questioned the rush and need to impose a system that has not yet been proven to work on manufacturers, which could also change when international standards come into effect.
“The solution is a system which generates revenue for the receiver, which helps maximise manufacturers’ efficiency and addresses the key issue of illicit trade.”
She said that while BAT was not opposed to a track-and-trace system, “we are seeing a pattern where systems are being imposed on manufacturers”.
“We appeal to Sars to consult before implementing.”
Andeliswa Mzinyathi, BAT SA’s legal and external affairs manager, said there were clear weaknesses in the proposed systems, “which we believe will lead to the rise in illicit trade and tax evasion”.
“The only way to monitor illicit activity is from the raw-material level where the exact amount of tobacco which goes into products is measured. It must be done from this point because this is where illicit traders start to run their parallel production systems.”
Big Tobacco is a global serial repeat offender when it comes to illicit tobacco, and spends millions on lobbying to block regulation, promote its own agenda and to avoid scrutiny and minimise excise tax payments.
— Fita chairperson Sinen Mnguni
Tisa chairperson Francois van der Merwe said they supported track-and-trace in principle but not the way Sars wanted to go about the tender.
“The main problem for Tisa is volume verification, at the point of manufacture, because local manufacturers do not declare all their volumes in terms of the honesty-based system. We suggest this problem be addressed first.”
He said that according to Ipsos research, 80% of all cigarettes in SA were sold in the informal sector, with the majority sold as loose cigarettes.
“No track-and-trace system can follow loose cigarettes, but if the problem is addressed at the source, which is the manufacturer, then the tax is paid at that point and track-and-trace systems, based on open standards, can be introduced.”
Fita chairperson Sinen Mnguni said while they had not received satisfactory answers from Sars during consultations on the system, they supported track-and-trace initiatives.
He said given that the protocol stipulated that track-and-trace systems could not be performed by or delegated to the tobacco industry, they cautioned Sars to steer clear of the influence of Big Tobacco when it came to the selection of preferred systems.
“Big Tobacco is a global serial repeat offender when it comes to illicit tobacco, and spends millions on lobbying to block regulation, promote its own agenda and to avoid scrutiny and minimise excise tax payments.”
Amalgamated Tobacco Manufacturers (ATM) owner Yusuf Kajee said in principle he supported efforts by Sars to combat illicit tobacco manufacturing and trade, but added that new systems had to be transparent and free of any industry control, with proper consultations.
“There are too many unanswered questions, which has created a lot of doubt and uncertainty among the players in the industry. ATM finds the timing of the tender as a reaction by Sars to the unending pressure being pressed upon the organisation by the industry’s monopolies.
“Of concern is the governance around the process. Given the findings of the Commission of Inquiry into Tax Administration and Governance by Sars, ATM is not convinced that the tender process and the system that may be selected is one out of reach of the spin doctors in the industry, who seek to capture the system for control and market dominance.
“Sars is unknowingly creating a bigger demand for cheaper tobacco products [illicit] via the proposed track-and-trace solution.”
While Sars spokesperson Sandile Memela declined to comment on detailed questions, KRA commissioner of domestic taxes Elizabeth Meyo dismissed claims that the system had fuelled the illicit trade of tobacco products.
“Implementation led to an increase in revenue from KES280m [R46.6m] to KES350m [R58.3m] per month. With the additional rollout of the track-and-trace system, excise revenue has grown to an all-time high of KES1bn [R166m] per month. The system is an effective tool.”
University of Cape Town economics professor Corne van Walbeek said the country lost an estimated R5bn annually to illicit manufactured tobacco, with revenue losses occurring through under-declarations.
“Track-and-trace systems are international best practice. Claims that they drive illicit trade are nonsensical.”
• BAT sponsored a site visit to its manufacturing plant in Kenya.
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