SA in danger of losing its tobacco-growing industry

Cigarette Source: Google Images

Illicit trade in tobacco and other products has flourished since the skills exodus that effectively eliminated the investigative and enforcement capacity of the SA Revenue Service since 2014.

SA is at risk of losing its tobacco-growing industry following a decision by British American Tobacco Southern Africa (Batsa) to notify the country’s only tobacco processor, Rustenburg-based Limpopo Tobacco Processors (LTP), that it may have to consider buying foreign tobacco should the illicit industry gain further traction.

Batsa has written to LTP, which buys and processes most of SA’s tobacco crop from about 100 commercial farmers and about 150 emerging farmers, pointing out deteriorating market conditions for the tax-paying portion of the industry.

In its letter, Batsa says that sales volumes have declined from 15.2-billion cigarettes in 2016 to an estimated 11.5-billion in 2018, “solely as a result of the ever-increasing availability of illegal cigarettes for R10 per pack on average”.

Academics and industry sources estimate that 40% of tobacco sales are produced locally but sold without the payment of excise tax, constituting a loss to the fiscus of about R8bn a year.

The tobacco companies concerned claim they do pay excise tax. However, they do not disclose their sales.

Illicit trade in tobacco and other products has flourished since the skills exodus that effectively eliminated the investigative and enforcement capacity of the SA Revenue Service (Sars) in the years since 2014, when Tom Moyane took over as commissioner.

In December 2018, research firm Ipsos said cigarettes selling for less than the tax of R17.85 per pack owed to Sars had grown market share more than 25%, from 33% to 42% in the informal market, in just three months.

Rising taxes

Consequently, the amount of tax lost to the fiscus had increased from about R7bn a year to about R8bn.

The letter says that in March 2016, Batsa, which constitutes 90% of LTP’s R650m a year business, agreed to extend the duration of their purchasing agreement for another five-year term as long as cigarette sales volumes did not fall below 10-billion sticks at any time during the contract term.

Batsa is anticipating that in 2019, assuming an excise increase in line with inflation, coupled with a continued failure by the government to meaningfully enforce its laws against illegal cigarette makers, volumes will decline to 9.5-billion sticks. At that point, it could exercise this “break” clause.

The letter written in December 2018 by Batsa CEO Soraya Benchikh says: “We are both acutely aware of the economic impact of Batsa offshoring its leaf procurement, which is why I prefer to begin preparing as early as possible for that eventuality and to give you as much advance notice as possible.”

Benchikh says that her letter is not a formal notice of termination, but “our sense is that we have no option but to begin preparations for the worst”.

The letter “puts the very existence of our company in doubt”, said Christo van Staden, the MD of LTP.

“With an estimated global overproduction of tobacco leaf expected this year and declining markets, it will be impossible for LTP to find alternative markets for these huge volumes of tobacco,” Van Staden said.

The primary tobacco industry employs 10,000 farm workers with 35,000 dependants, he said.

Van Staden said he had written to finance minister Tito Mboweni and other ministries to ask them for a meeting to discuss the issue.

Apart from acknowledgement of receipt of the letter,
he has heard nothing yet from any branch of government.

Van Staden said his short-term request to the government was not to impose any further increases in excise taxes on cigarettes in 2019, because that would simply make the non-tax-paying products even cheaper by comparison with legal products.

According to Ipsos, Gold Leaf Tobacco’s RG brand is now
the top-selling cigarette brand in SA overall, overtaking all
legal brands.

“It sells for an average price of just R10 and is therefore clearly evading the R17.85 owed to Sars on each pack, Ipsos said.

The National Treasury had not responded by the time of publication.