Illicit cigarette trade in South Africa: 2002–2017

Abstract

BackgroundIncreasing cigarette excise taxes is widely recognised as the most effective measure to reduce the demand for cigarettes. The presence of illicit trade undermines the effectiveness of tax increases as both a public health and a fiscal measure, because it introduces cheaper alternatives to legal, full-priced cigarettes.ObjectiveTo assess trends in the size of the illicit cigarette market in South Africa from 2002 to 2017 using gap analysis.MethodsTax-paid cigarette sales are compared with consumption estimates from two nationally representative surveys: the All Media and Products Survey and the National Income Dynamics Study. We explore the size of the illicit cigarette market and its changes over the period 2002–2017.ResultsSince 2009, illicit trade has increased sharply. We estimate that illicit trade is between 30% and 35% of the total market in 2017. The acceleration in the growth of the illicit market since 2015 corresponds with a turbulent time at the South African Revenue Service, when many of the enforcement functions were greatly reduced.ConclusionsThe current levels of illicit trade are extremely high and need to be addressed urgently by implementing effective control mechanisms such as a track and trace system to monitor the production, taxation, and sale of cigarettes.

Illicit/cheap cigarettes in South Africa

“…The substantial increase in the illicit cigarette trade in South Africa since 2010 and especially since 2015 is cause for concern. Illicit trade undermines the country's fiscal and public health agendas, and supports organized crime (Pauw 2017;Judge Nugent 2018a, b;Vellios et al 2019). At least three academic studies, using different methodologies and survey techniques, have estimated the size of the illicit market since 2015 and find that the illicit market comprises between 30% and 40% of the total market (Liedeman and Mackay 2015;van der Zee et al Forthcoming;Vellios et al 2019).…”

“…Since its relaunch in 2006, TISA's main argument has been that the illicit market is substantial and growing (van Walbeek and Shai 2015). TISA made this claim despite the fact that, prior to 2009, they could offer no evidence to support this position (van Walbeek 2014;Vellios et al 2019). Based on international precedents (Smith et al 2013), it seems that the primary rationale for making this argument was to dissuade National Treasury from increasing the excise tax on cigarettes.…”

“…A number of independent studies have estimated the size of the illicit market over the past decade (Blecher 2010;van Walbeek 2014;Liedeman and Mackay 2015;van Walbeek and Shai 2015;van der Zee et al Forthcoming;Vellios et al 2019). The techniques vary, but an overarching finding is that, until about 2015, the estimates of the independent studies were substantially lower than those of the tobacco industry.…”

“…Over this period there were also significant increases in the excise tax on cigarettes. Recent academic estimates suggest that illicit trade rose substantially after 2014 when SARS came under pressure, to as high as 35% of the market in 2017 (Vellios et al 2019). Between 2015 and 2018, real (inflationadjusted) government revenue fell by 23% ( Fig.…”

Tobacco industry tactics in response to cigarette excise tax increases in Mauritius

“…From the tobacco industry's perspective, a drawback of overshifting the excise tax is that it may encourage competitors to enter the market, which may undercut the prices of the incumbent firm(s), as has been observed since 2010 in South Africa. 11 BAT Mauritius's strategy of overshifting the excise tax has precedent in a number of countries, including the UK, Turkey, New Zealand, Taiwan and South Africa. [12][13][14][15][16] If the dominant tobacco company has market power, it has price setting ability.…”