Tobacco – the R12.5bn question

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Johannesburg – A study released this month has sparked debate on whether smoking is decreasing or increasing, reported City Press on Sunday.

Depending on who you ask, smoking in South Africa is either radically decreasing due to two decades of successful tobacco control laws and taxes, or massively increasing again because those laws and taxes have opened the door to a colossal black market.

Based on tax figures, legal cigarette sales are now at their lowest level since 1976.

A study also estimated that the prevalence of smoking has dropped dramatically to 16.4% of adults, from 22% five years ago.

The tobacco industry disputes the figures and argues new laws or taxes are actually increasing the prevalence of smoking, and will continue to do so.

As new, stricter smoking regulations loom, the economic stakes are, however, as high as ever.

South Africans smoked about 1.12 billion legal packs of cigarettes last year, based on data from the National Treasury on so-called “sin taxes”.

Those excise taxes of 52% added up to R11.4bn and are expected to reach R12.5bn this year.

Illegal cigarettes

Another 340 million packs of illegal cigarettes were sold, costing the treasury billions, according to the Tobacco Institute of Southern Africa (Tisa).

This in itself created “unfair competition” for the legitimate tobacco industry and leads to an increase in smoking, Tisa said.

If the industry estimates are added to government data on legal sales, it shows a “massive increase” in smoking – not the steady decline most stakeholders assume is happening, according to Cornelius van Walbeek, an associate professor at the University of Cape Town’s school of economics and head of the school’s economics of tobacco control project.

The research done for Tisa is “in principle, very plausible”, said Van Walbeek.

It entails surveys of cigarette-buying customers at retail outlets, including buying packets of cigarettes from smokers in order to inspect and test them for signs of illegality.

Van Walbeek said his own research indicates that there was a “pretty significant spike” in illicit trade in 2010.

In 2008, Tisa estimated that 6% of cigarettes were illegal and that rose to 21% in 2010.

Last year, it jumped to 30%.

Illicit trade

The industry has an interest in presenting the illicit trade as a big problem, Van Walbeek warned.

The rising cost of cigarettes is “by far” the most powerful anti-smoking tool, he said. The extent to which it is being undermined by illegal cigarettes is key to the debate around tobacco control into the future.

“Since 2002, all the price increases have been due to the tobacco companies,” said Dr Yussuf Saloojee, the executive director of the National Council Against Smoking – a veteran of the local tobacco control movement.

According to him, the excise tax has remained constant at 52% and only increases every year in reaction to the industry’s price increases.

“The industry is going for profits over volumes. Treasury hands over its tax policy to the cigarette companies,” he said.

“My view is that illicit trade has gone up, but that it is the tobacco companies themselves that are doing it.”

Excise taxes create the incentive to “round-trip” cigarettes, meaning to manufacture them for export to avoid the tax, but then return them to the local market.

He also thinks the industry’s claims about the extent of illicit trade are “crazy”.

Decrease in smoking?

Tisa CEO Francois van der Merwe feels much the same about opponents’ estimates about the decrease in smoking.

“My argument is that you should just stop the smuggling and enforce the existing regulations,” he said. “That will achieve a decrease in smoking.”

Tisa calls the pending regulations “extreme” and argues that they will harm small businesses like taverns and push more of the tobacco market into illegality.

The 52% sin tax, which has been in place since 2002, “created the opening” for illegal cigarettes, said Van der Merwe.

Since then, other regulations have widened it, he argued.

According to Tisa, South Africa has far higher taxes on cigarettes compared with neighbouring nations, which has led to a “suction down into South Africa from the region”.

The Zimbabwe factor

Van der Merwe claimed that 50% of the illegal cigarettes originate from Zimbabwe. These are legitimate cigarettes smuggled into South Africa to avoid excise taxes.

“In South Africa, we do not have counterfeit cigarettes that impersonate well-known brands,” he said.

The other half of the “illicit market” involves dodgy local operations that produce cigarettes that look legitimate, but cut corners on manufacturing standards like nicotine levels and the low ignition propensity cigarette paper that has been mandatory since 2011.

“You have to give credit to (Minister in the Presidency) Trevor Manuel and (Finance Minister) Pravin Gordhan,” said Van der Merwe.

“They know that if you increase the tax, smuggling will grow.”

South Africa adopted its first real anti-smoking law in 1993 and by 2001, banned cigarette advertising and partially banned smoking in public.

New regulations, published last year, aim to ban all indoor smoking in public areas and restrict smoking outside.

– City Press




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