Illicit Tobacco Trade: SARS briefing

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Finance Standing Committee

19 November 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

The Standing Committee on Finance meeting on the illicit tobacco and cigarette trade was a follow up to an earlier hearing on the tax laws, at which Members heard that the legal trade was being endangered by illegal traders who paid no tax. The Chairperson said if nothing was done, the legal industry would collapse, leaving only illegal traders selling dangerous products which did not comply with quality standards.

SA Revenue Service (SARS) officials told the Committee that 45.9 million cigarettes worth R40 million had been seized in the past seven months. In the Western Cape, a container of cigarettes from Dubai was found to contain 1 000 master cases of illegal cigarettes. In Gauteng, 25 master cases of Caspian cigarettes without excise stamps were seized. SARS was finalising procedures for seizing 165 tons of unprocessed tobacco which was being held at a customs warehouse in Gauteng. In the North West Province, 281 master cases of cigarettes were found hidden in a false compartment of a 40-foot container.

Three criminal cases of cigarette and tobacco smuggling were currently before the courts. SARS was also pursuing a civil case involving R200 million in losses to the fiscus.

SARS said new measures for countering the illegal trade were being considered. These included forestalling regulations on the volumes of cigarettes that could be stored by a manufacturer. Also under consideration was a requirement for counters to be installed on cigarette manufacturing machines. Tenders would be called for a track and trace project to monitor the movement of cigarettes from production to point of sale.

Committee Members expressed concern about the extent of the illegal trade and questioned whether SARS had the capacity to deal with it. The Committee would hold a meeting on illicit financial flows early in the new year. SARS, the South African Police Service (SAPS), the Reserve Bank and the Financial Intelligence Centre would be required to attend.

Meeting report

The Chairperson said the meeting was a follow-up on an earlier hearing at which the tobacco industry had raised concerns about the impact of the illicit tobacco trade on the legal industry. He said if nothing was done, the legal industry would collapse, leaving only illegal traders selling dangerous products which did not comply with quality standards. He invited officials from the South African Revenue Service (SARS) to make a presentation.

Mr Kumaran Moodley, Executive Head: Customs and Excise, SARS, told the Committee there were 19 registered primary and secondary tobacco and cigarette manufacturers in the country. Ninety percent were based in Gauteng. There were 180 importers and exporters that dealt in tobacco, cigarettes and primary cigarette products. He presented tables showing monthly imports and exports of tobacco products.

An overview of imports for the period of April to September 2018 compared to the same period in 2017 showed:

  • An increase of 195% in cigarette imports under the purpose code/customs procedure code DP/A11, from 24 million sticks to 72 million sticks. This was due to a 234% increase in imports from Switzerland.
  • An increase of 57% in cigarette imports under the purpose code/customs procedure code WE/E42, from 236 million sticks to 370 million sticks. This was due to a 98% increase in imports from China.
  • A decrease of 0.88% in cigarette imports under the purpose code/customs procedure code WH/E40, from 1.51 billion sticks to 1.50 billion sticks. This was due to a 59% decrease in imports from Tanzania.
  • Exports during the same periods showed:
  • A decrease of 0.62% in cigarette exports under the purpose code/customs procedure code ELG/H60, from 2.21 billion sticks to 2.20 billion sticks.
  • An increase of 524% in cigarette exports under the purpose code/customs procedure code EX1/ H61, from 385 million sticks to 2.4 billion sticks. This was due to an increase of 748% in exports to Namibia, and a 493% increase in exports to Botswana.
  • An increase of 46% in cigarette exports under the purpose code/customs procedure code ZE/H68, from 767 million sticks to 1.1 billion sticks. This was due to a 617% increase in exports to Zimbabwe.

Mr Moodley briefed Committee Members on SARS actions against the illegal trade over the past seven months. In 306 cases investigated by SARS, 45.9 million cigarettes worth R40 million were seized. In another 23 cases, 11 740 kg of tobacco worth R77 000 was seized.

In the Western Cape, a container of cigarettes from Dubai was abandoned after being targeted by the customs department. The shipping documents were found to be false and 1 000 master cases of Royal cigarettes were seized.

In Gauteng, 25 master cases of Caspian cigarettes were seized because cigarettes that were being distributed did not have an excise stamp. SARS was also finalising procedures for seizing 165 tons of unprocessed tobacco which was being held at a customs warehouse.

In the North West Province, 281 master cases of cigarettes were found hidden in a false compartment of a 40-foot container.

Three criminal cases of cigarette and tobacco smuggling were currently before the courts. SARS was also pursuing a civil case involving R200 million in losses to the fiscus.

Mr Moodley said SARS was currently conducting periodic visits to tobacco and cigarette manufacturers, and officers had also been deployed to a number of facilities to monitor production and distribution.

Legislative and policy changes currently being considered included registration requirements for leaf threshers, and the implementation of forestalling regulations on the volumes of cigarettes that could be stored by a manufacturer. Also under consideration was a requirement for counters to be installed on cigarette manufacturing machines. Tenders would be called for a track and trace project to monitor the movement of cigarettes from production to point of sale.

Discussion

Ms M Mabiletsa (ANC) said that in spite of efforts to counter the illegal trade, the manufacture of illegal cigarettes was continuing and the government continued to lose tax revenue. The issue of illicit trade in tobacco was in the public domain, and people wanted to know what was being done about it.

Ms P Abraham (ANC) asked what cooperation there was between SARS and the Department of Home Affairs (DHA) in countering smuggling. She asked for more details about the civil case involving R200 million. On the statistics provided by SARS, she commented that the figures on their own did not say whether there was progress in combating the illegal trade. Illegal cigarettes might pose a health risk in that it was not known what substances they contained.

Mr G Skosana (ANC) said it was a serious concern that there were only 19 registered and licensed tobacco processors and cigarette manufacturers, while there were 180 importers and exporters of tobacco products. He asked how old the case involving the R200 million was, and what the success rate had been in previous cases.

Mr E Buthelezi (IFP) said the problem of illicit tobacco had been brought home to him when he noticed an increase in smoking among young people. He was told by a tuck shop owner that he no longer sold legal sticks - single cigarettes - because they cost R2 as opposed to 60c for illegal sticks. He asked about SARS’s relationship with the SA Police Service (SAPS) and whether SARS had sufficient capacity to deal with illegal traders.

Mr I Morolong (ANC) said the seizure of illegal products looked good on paper. However, there was a view that SARS’s capacity to deal with illicit tobacco had been diminished in recent years with the disbandment of some units at SARS.

Mr G Hill-Lewis (DA) asked what progress was being made with the track and trace project, which had been delayed three times. He did not agree that seizing 45 million cigarettes in half a year was a good performance. About 30 billion cigarettes a year were consumed in South Africa. The seizures were not scratching the surface of that market. What additional resources were being allocated to disrupting the supply of illegal cigarettes?

Ms M Mohlala (EFF) asked about the balance between imports and exports of cigarettes. Local producers should be protected against imports. What were customs officials doing to prevent illegal cigarettes coming in through the country’s ports?

Responses

Mr Intikhab Shaik, Acting Chief Officer: Digital Information Services, SARS, agreed with Members that SARS had to “up its game.” He said SARS certainly had the capability to do its work, but it had lost certain skills and capacity needed to be rebuilt. The relaunching of SARS’s large business centre a few weeks previously was a first step in re-establishing SARS where it had been five years ago.

There was a general relationship between SARS and DHA, in which they shared information about individuals’ movements. When it came to companies, SARS had a relationship with the Companies and Intellectual Property Commission (CIPC). Tobacco companies had to register with the CIPC before being registered with SARS. SARS had a good relationship with the SAPS.

On imports and exports, Mr Shaik said that “the arrows are in the right direction.” The figures showed a decrease in imports and an increase in exports. He reminded Members that the excise duty was a health tax, not a revenue-raising one. In was intended to discourage people from smoking. It was impossible to gauge the extent of smuggling on anecdotal evidence. However, it was interesting that the tables on exports and imports showed that unit values were increasing. American customs officers used the price of drugs in the illegal market to determine whether their countermeasures were succeeding - if prices went up, it meant the supply had been reduced.

Mr Shaik said SARS was developing risk engines which gathered and analysed customs and excise data, as well as information on passenger movements. This would help them to see how the movement of people related to the movement of goods. It was one thing to seize goods, but it was also necessary to “follow the money” and catch the person behind the smuggling.

SARS and Botswana exchanged information electronically about goods crossing their border and this exercise would be extended to Lesotho and eSwatini.

Mr Shaik said the public had a responsibility to play their part in curbing smuggling. If they saw a shop selling 60c sticks, they should report it. SARS was looking at introducing technology to make it easy for people to send tip-off messages by cell phone.

Mr Moodley said the amount of R200 million referred to a single case which had been ongoing for about eight years. It involved imported cigarettes which had been stored in a bonded warehouse. They were supposed to be exported, but had instead been diverted to the local market.

Mr Chris Axelson, Chief Director: Tax Analysis, National Treasury, told the Committee that there had been a big drop-off in tobacco excise revenues in the 2017 fiscal year, when R11 billion had been collected against a forecast of R17 billion. However, excise duty collection had improved by nine percent the following year.

Mr Yanga Mputa, Chief Director: Tax Policy, National Treasury, said it was expected that the tender process for the track and trace project would be completed early in 2020.

Closing remarks

The Chairperson referred to claims made by the Tobacco Institute of Southern Africa (TISA) at an earlier hearing that SARS and SAPS knew the location of warehouses where illegal cigarettes were stored. If this was true, why was no action being taken?

He said the country was being flooded with counterfeit goods. During a raid on illegal street traders, several police officers had been arrested. There was an illicit fuel trade in which VAT-free paraffin was added to diesel. Foreigners were operating unregistered shops. It was not xenophobic to expect foreigners to obey the laws of the country. If nothing was done, the public would lose confidence in law enforcement.

The Committee would hold a meeting on illicit financial flows early in the new year. SARS, SAPS, the Reserve Bank and the Financial Intelligence Centre would be required to attend.

The meeting was adjourned.

 

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