South Africa: SARS Clamping down on Illegal Tobacco Trade

Source from:  South African Government News Agency (sa)  08/21/2014

The South African Revenue Services (SARS) says government is losing out on more than R3 million in excise and Value Added Tax (VAT) revenue annually due to the illegal trade in tobacco.

According to SARS Chief Officer for Tax and Customs Enforcement Investigations, Gene Ravele, the illegal trade costs the legitimate tobacco industry R2 billion in revenue.

Addressing the Portfolio Committee on Trade and Industry, Ravele said a smuggled 40 foot container with 1100 master cases of cigarettes amounted to a loss of approximately R7.2 million to the fiscus and "clean profit to the smuggler".

One in four cigarettes smoked in South Africa are illegal products, equating to more than 29 percent of the total market. Further, some 15 million cigarettes – or 750 000 packets of 20s – are sold illegally in the country every day.

Ravele said SARS seized R109 million worth of illicit cigarettes in the last financial year.

He explained that currently the excise duty on a packet of 20 cigarettes is R11.60 and VAT is R1.62 per pack with the estimated manufacturing cost per pack of 20s at R1.

"Therefore a packet of cigarettes should ideally not be sold for less than R16.50 to include the manufacturing cost, distribution cost and some profit margin as well as the relevant taxes," he said.

Over the past 10 years, organised crime groups have advanced from supplying counterfeits to now managing all aspects of the production process, from sourcing raw tobacco product through to developing specific tobacco packaging.

Other groups rely on overseas facilitators who engage with smaller legitimate tobacco manufacturers in sourcing the tobacco goods and associated packaging. Some simply exploit lower cross-border prices of genuine tobacco products and smuggle them to their chosen destination for sale.

"The sophistication and complexity of the smuggling depends upon the size and ambition of the groups involved and the nature of the commodity."

SARS has embarked on campaigns which have, in certain cases, resulted in increased levels of compliance in terms of higher values being declared as well as an increase in numbers of excise manufacturing volumes being submitted.

The revenue service has also been increasing the supervision of cigarettes exported via warehouses, improving the manual tracking of cigarettes in transit through South Africa and working with tobacco industry experts to develop a way of detecting illicit cigarettes.

It is also working on improving public awareness around identifying illicit cigarettes.

Ravele said actions taken to date include weekly factory visits, suspension of licences, the liquidation of assets and the sequestration of the responsible individuals.

SARS enforcement was following a segmentation approach to the illicit economy which is in turned aligned to its compliance strategy.

"This has created enhanced knowledge around the various industries which in turn allows for more focused interventions into dealing with detected non-compliance." Enditem