South Africa struggling to plug a hole leaking R100 million a day

South Africa has implemented several interventions to prevent the sale of illicit cigarettes, which is costing the country roughly R100 million per working day.

These interventions include auditing the supply chain, placing CCTV cameras and inspectors in factories, and establishing a division to investigate criminal and syndicated tax evasion schemes.

This is according to Finance Minister Enoch Godongwana, who was responding to a question from Economic Freedom Fighters MP Thapelo Mogale.

Mogale’s question follows a report conducted by Ipsos and commissioned by British American Tobacco (BAT), which surveyed the sale of illicit cigarettes in the country.

“Our analysis indicates that the illicit cigarette trade costs South Africa approximately R100 million every working day,” said the area head of corporate and regulatory affairs for BAT South Africa, Jonny Moloto.

“This represents more annual revenue than the South African Revenue Service’s (SARS’) entire additional collection target. Eliminating this leakage would protect law-abiding taxpayers from bearing additional tax burdens.”

Godongwana says that SARS has adopted a multi-faceted strategy to combat the illicit trade of cigarettes and tobacco in South Africa.

One way the taxman is going about the problem is by intercepting and seizing illegal cigarettes at entry points by conducting joint operations with other law enforcement agencies.

The Minister said this helps to ensure that SARS focuses on recouping the taxes and taking the product out of circulation.

While this may prove effective in nominal terms, the Ipsos report said that locally manufactured brands continue to dominate the illicit cigarette market.

To this end, SARS is cracking down on local manufacturers with dedicated tobacco audits that focus on the entire value chain, from raw material supply to production and distribution.

“Part of the strategy includes technological surveillance initiatives such as CCTV monitoring,” Godongwana said.

“This required the installation of cameras at tobacco manufacturing facilities to monitor production and prevent tax evasion.”

However, the Minister says this initiative has been delayed due to legal backlash from industry players. Despite this, SARS plans to place inspectors at these factories full-time.

SARS has also assembled a rapid response team to conduct ad-hoc risk-based inspections at cigarette manufacturing warehouses.

Godongwana said several arrests had been made in the 2024/25 fiscal year, and cases were at different stages of investigation and litigation. Only one successful prosecution has been carried out.

He added that SARS’s Criminal Investigation Unit has handed 129 Customs and Excise cases to the National Prosecuting Authority (NPA) in the past five years.

“There are currently 105 cases on the NPA roll, 33 of which are on trial while 72 are pending the allocation of a trial date.” 

“Eight of these cases relate to illicit Cigarettes and Tobacco, of which four are on trial and four are awaiting the allocation of a trial date.”

R27 billion a year

Godongwana noted the illicit cigarette trade’s impact on the South African economy, saying the country is losing out on an estimated R27 billion in annual tax revenue.

“Publicly available estimates suggest that up to 70% of cigarettes sold in the country are illicit, resulting in annual tax revenue losses exceeding R27 billion,” Godongwana said.

He added that data from SARS shows that tax collection from tobacco and cigarette products declined by R4 billion between the 2015/16 fiscal year and 2024/25.

This is a 29.6% decrease and a ten-year compound annual growth rate of -3.8%.

The Ipsos report shows that 76.7% of South African retailers sell cigarettes below the tax threshold. The study surveyed 4,812 shops nationwide by asking for the cheapest pack of cigarettes at each location.

Of the stores surveyed, 69% sold cigarettes below R20 per pack, while 76.6% sold below the minimum collectable tax (MCT) threshold of R26.22.

This is a significant increase from research conducted in 2022, which found that 27.4% of stores sold below the MCT.

“With the clock ticking for SARS to collect at least an extra R20 billion, these results from Ipsos show the need for immediate steps to plug the leaks in tobacco tax collection,” Moloto said.

“Despite increased enforcement activity over the past year, illicit products remain as available as ever, suggesting that current tactics fail to address the root causes of tax evasion.”