The South African Illicit Trade

South Africa is the first country in the world to allow an illegal brand to become its top-selling cigarette.

Illegal cigarettes today account for approximately 33% of all cigarettes sold in South Africa. Such cigarettes are particularly prominent in the informal trade, where they make up an astounding 42% of the informal market.

What are illegal cigarettes?

Illegal cigarettes are cigarettes on which the correct excise tax has not been paid. These can easily be spotted by their low price. There are four recognised categories of illegal tobacco products that can be found globally, as described by the WTO:

  • Contraband: Smuggled into markets from either neighbouring markets or transnational routes
  • Illegal whites: Unbranded, mass produced, unpackaged smuggled loose cigarettes
  • Local tax evaded: Locally produced cigarettes that enter the market from production leakages in the manufacturing and excise declaration process
  • Counterfeit: IP infringement of tobacco brands

In any of the definitions listed above, the typical marker is a retail selling price that is significantly lower than either the taxes due or standard market prices. Transferring the concept to a local example, a pack of 20 cigarettes selling for below the Minimum Collectible Tax (MCT), as announced by the Minister of Finance each year, should be considered illegal, according to an Eastern Cape High Court judgment in 2015 (National Director of Public Prosecutions versus Adan, 2015).

As of 2020, the minimum collectible tax on a pack of 20 cigarettes is R20.01, making any pack selling for less than this suspect of being illegal.

Many assume that illegal cigarettes are smuggled into the country or are counterfeit versions of legitimate cigarette brands. While such illegal cigarettes would indeed be illegal, these do not form the bulk of illegal cigarettes sold in South Africa.

Instead, South Africa’s illegal cigarette market is heavily dominated by local, licensed tobacco manufacturers who do not declare all their manufactured product to the South African Revenue Services (SARS). It is now estimated that over 90% of all illegal cigarettes in South Africa are manufactured locally, in factories that are quite visible in some of our biggest metropoles.

The Ipsos Tobacco Market Studies commissioned by the now-defunct Tobacco Institute of Southern Africa (TISA), showed that RG cigarettes are now the top-selling brand in the country. In November 2018, the study revealed that the RG brand sells for an average of R10 per pack, well below the MCT at the time of R17.85. RG is manufactured by a SARS registered tobacco manufacturer, with a factory in Johannesburg.

Manufacturers of illegal cigarettes produce and earn profit on vast volumes of cigarettes, while paying SARS only a small portion of the tax owed. This under-declaration of volumes equates to tax evasion and costs the South African fiscus a conservative estimate of R8 billion every year.

In addition to depriving the Government of much-needed tax revenue, the illegal tobacco trade harms the social fabric of South Africa in many ways, with government’s Non-Communicable Disease health strategy the most impacted. Other studies done outside of South Africa have found that revenues from illegal trade support further criminal activities such as human trafficking, terrorism activities, and corruption, amongst various examples of criminal activities linked to illegal trade.

Growth in locally produced illegal cigarettes has significantly eroded the value chain in the legal cigarette market. BAT South Africa’s business has declined by 30% since 2012, forcing us to adjust the size and structure of our business.

Facts and figures come from the latest Ipsos Tobacco Market Study, released in November 2018. Read the report .

Illicit trade under Covid 19 lockdown

During the 2020 Covid 19 Lockdown, with sales of cigarettes prohibited between Risk Adjusted Alert Levels 3 to 5, the South African tobacco value chain experienced an unprecedented increase of illicit trade. The illicit tobacco trade exploded from approximately 30% of the total market to 100% of the total market as illicit tobacco value chains were strengthened.

The UCT Research Unit on the Economics of Excisable Products (REEP) consumption studies conducted during the lockdown period found that during the prohibition, consumption continued unabated, with more than 90% of consumers still smoking. The continued consumption of tobacco products was a result of freely available illicit cigarettes, albeit at hugely inflated prices. The wide availability of previously ultra-cheap local brands commonly found to be below MCT and an increased influx of non-compliant brands from neighbouring markets completely negated the health objectives of the prohibition as illicit suppliers exploited desperate consumers. The net effect was that the illicit trade flourished and those with established supply chains reaped extraordinary profits for five months without any legal product competition.

Fighting the illicit market

The illegal tobacco trade is not only a threat to our business, but also a more serious national and social threat: that of organised crime.

For BAT SA, protecting consumers and our business from the illegal tobacco trade is imperative. Doing so not only helps to address a significant threat to the viability of our business (and industry), but also a more serious national and social threat to South Africa: organised crime and corruption.

For a long time, the issue of illegal trade was known only to those in the tobacco industry – those whose very businesses and livelihoods were being impacted by the decline in sales of legal cigarettes: legal manufacturers, farmers, and processors.

Through various memberships in business, trade and industry organisations, BAT South Africa supports efforts by various organisations and formations to raise awareness of the threat and impact of the illegal trade.

Keeping our own house in order

BAT SA’s approach to fighting the black market in tobacco includes:

  • Effective internal governance and supply chain security
  • Informing regulators about the impact of the illegal tobacco trade
  • Engaging stakeholders and regulatory bodies to increase understanding of the issue
  • Raising awareness of the issue among our employees, business partners and the public.

BAT SA fully supports any action taken by the South African Police Service, SARS, the Southern African Customs Union, and other national and international bodies to curtail the illegal tobacco trade. Where authorities request information or help from us, we will gladly assist.

How to spot illegal cigarettes

It’s easy: you can spot illegal cigarettes by their price.

Illegal cigarettes are easily identified by their price: any pack of 20 cigarettes selling for below R 20.01 in 2020 is suspicious. This is because cigarette manufacturers must pay excise tax, calculated at R 17.40 for a pack of 20 cigarettes post Budget 2020, as well as the requisite VAT. Therefore, Minimum Collectible Tax (MCT) is R20.01 per pack of 20 cigarettes.

As confirmed by an Eastern Cape High Court judgment in 2015 (National Director of Public Prosecutions v Adan, 2015), selling a pack of 20 below MCT is an indication that the requisite taxes may not have been paid, which is a contravention of the Customs and Excise and the Income Tax Acts. Most illegal cigarettes are sold significantly below MCT.

The sale of cheap cigarettes undermines carefully determined tax policy by reducing the sale price of cigarettes. Excise tax on tobacco plays a crucial part in a pricing policy that is aimed at reducing the affordability, and hence demand, of cigarettes. Essentially, cheap illegal cigarettes make smoking more accessible to those who might be deterred by higher prices.

Illicit Trade in South Africa Fact sheet (489 kb)