Representatives of the South African tobacco industry told the Committee that as a result of the five-month ban on cigarette sales during the Covid-19 lockdown, 50% of the market was now in the hands of illicit traders. They made a plea for relief from the 8% increase in excise duty during the Committee's consideration of the Taxation Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB).
The Chairperson, in his opening remarks, raised concern that the Bills had been placed on hold, stressing that there should be a sense of urgency when approaching these issues. He acknowledged, however, that these delays may be due to the COVID-19 lockdowns and the late Medium-Term Budget Policy Statement (MTBPS).
The South African Tobacco Transformation Alliance (SATTA) highlighted that about 30 tobacco farmers, who were mostly black, had gone out of business, which in turn had also left their workers without jobs. They urged government to quickly implement laws that would prohibit the illicit cigarette trade from growing any further. An effective system would include immediate enforcement of the South African Revenue Service (SARS) production counter rules by all local manufacturers; end-to-end frequent and comprehensive audits of all manufacturers; stricter border control and enforcement; ratification of the World Health Organisation protocol and implementation of an independent track and trace system; and implementation and full enforcement of a minimum retail sales price of R28 for 20 cigarettes.
The Black Tobacco Farmers Association of South Africa (BTFASA) echoed the sentiments of SATTA. Farmers who had invested money into their businesses for materials and equipment were now unable to make use of it. Sales of the most popular brands of legal cigarettes were down by 50%. Excise revenue was also down by half, while the illicit trade market had doubled in size. The proposed excise increases would make the cost of legal cigarettes prohibitive to the average consumer. This increase was propelling the handover of the country’s entire cigarette market to the illicit sector.
The Committee expressed empathy with the plight of the farmers, and sought answers from National Treasury and the SARS on what measures were being implemented to curb the flow of illicit cigarettes into the country, and why they were receiving no financial assistance from the government.
National Treasury said the flow of illicit cigarettes from neighbouring countries needed to be squashed through improved enforcement, and pointed out that an extra R3 billion budget had been allocated to SARS for this purpose. New procedures had been put in place and new staff had been allocated to check on the manufacturers of tobacco. However, excise policy should not be viewed as a means to counter this. Excise duty should not be reduced to try and avoid illicit trade.
SARS said it took the illicit trade of tobacco very seriously. A large amount of tobacco products had been seized and destroyed, and factories had been uncovered, closed and liquidated, although more needed to be done. Commenting on the suggested implementation of a minimum price, SARS said it was aware through research that illicit traders thrived on this, as it was a way of increasing their profits.
The Committee was concerned about “even one job” being lost. Members asked to what extent National Treasury engaged in negotiations with SATTA and BTFASA before the tax bills were finalised. Despite the legislation under consideration being S75 and the Select Committee could not make real changes, the Committee stressed that the matters raised by the submissions must be dealt with comprehensively. The Chairperson of the Committee said there was a concerted effort to balance the needs and interests of BTFASA, together with those of the sugar beverage tax colleagues, which were the same within the health sector. The Chairperson said that it was the work of the Parliament to ensure that thorough work was being done. It was the "People’s Parliament," and the Committee was a custodian of it. Action needed to take into account all the points raised. It was not enough for civil society organisations to present before Parliament and expect results overnight. A democracy was alive only when people put pressure on Parliament. He pleaded with SATTA and BTFASA to continue doing their work, and not to give up.
Chairperson's introductory remarks
The Chairperson welcomed the Members of the Committee and the guests from all the organisations present. He acknowledged the submissions made on the Taxation Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB) by the various organisations making oral presentations.
Presenters from the South African Tobacco Transformation Alliance (SATTA) had technical glitches and were unable to present at the allocated time. The Black Tobacco Farmers of South Africa (BTFASA) also had technical issues and could not join in time for the presentation. The Chairperson suggested that the time could be used by the Members to engage with submissions that had already been received.
The Committee Members did not have any comments on the submissions.
While waiting for SATTA and BTFASA to join the virtual meeting, the Chairperson gave National Treasury (NT) an opportunity to respond to the written submissions.
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury (NT), said that the written submissions were not different from what had been submitted. However, it was ready to respond orally.
The Chairperson said that if the Committee was convinced by what had been brought forward by both parties -- in this case, SATTA and BTFASA -- and they were not in agreement, the Bill would need to be sent back the following day. There may be difficulties in doing so, but there would need to be a compromise. Realistically speaking, even if the outcomes were looked at several times there would be no difference, given the delays from the local government elections and the Medium-Term Budget Policy Statement (MTBPS) being presented late. He was hoping that these delays would not happen again, and that they were due only to the special circumstances of COVID-19.
Although the Committee may comprise of Members from different political parties, there were no differences amongst them. As a Chairperson, he may feel at ease about processing the Bill quickly, but he was not convinced that there may be any changes to the Financial Sector Laws Amendment Bill. Not much could be done, and there may not be enough time for many changes to be made.
He said that as a Committee, there was dissatisfaction with the process issue within the National Assembly.
Mr Shadrack Sibisi, chairperson of SATTA, requested for a more sensible approach to the excise policy in order to suppress the broadening of the illicit market. The excise increase should be in line with inflation to allow the legal industry to recover and contribute to the economy. A sensible increase would ensure that healthy objectives were achieved by reducing the over-consumption of tobacco products which was due to the prevalence of cheap, non-tax paying cigarettes.
Extreme government interventions, such as the five-month sales ban in 2020, had led to an explosion of the illicit cigarette trade. This had set back the progress made by the South African Revenue Service (SARS) against illicit trade in 2019. There was a loss of over 50 000 jobs across the entire tobacco value chain. The government had collected almost R8 billion less in excise in the 2020/21 financial year. More people than ever before were smoking illicit cigarettes, which had set back the government's health agenda.
Mr Sibisi said SATTA had made it clear what it believed an “effective system” should include:
- Immediate enforcement of the SARS production counter rules by all local manufacturers.
- End-to-end frequent and comprehensive audits of all manufacturers.
- Stricter border control and enforcement;
- Ratification of the World Health Organisation (WHO) protocol and implementation of an independent track and trace system
- Implementation and full enforcement of a minimum retail sales price of R28 for 20 sticks.
He said it was unfortunate that he needed to narrate that in the period of 2020/21, 30 emerging farmers who were mostly black, were put out of business due to the growth in the illicit trade market. It was saddening to see the rate at which people were losing jobs, as this not only affected the farmers, but also the employees. Both the farmers and their employees had to queue for grants, as they had found themselves jobless. He pleaded that there was a need for those responsible to make the necessary enforcement to ensure that all due taxes were paid. The livelihood of farmers and those that worked on the farms had been impacted negatively. The five-month ban on cigarettes had meant the illegal sector had achieved 100% increase in market share.
He also deplored the 8% excise increase by National Treasury, when inflation was at 4.9%. How was the industry to survive under these trying conditions? There was no problem with paying taxes, as this was compulsory, but the playing field needed to be levelled.
The Chairperson of the Committee noted the points made throughout the presentation, and said that there was shared sympathy with the organisation. He handed over to BTFASA.
BTFASA submission on draft Rates, Monetary Amounts and Amendment of Revenues Bill
Mr Jabulani Tembe, General Secretary: BTFASA, said that the increase in the proposed Bill would put the excise incidence on cigarettes in the most popular price category (MPPC) at 45%. Dozens of farmers had already gone out of business due to the ban on cigarette sales during the COVID-19 lockdown period. Sales of the most popular brands of legal cigarettes were down by 50%. Excise revenue was also down by half, while the illicit trade market had doubled in size.
The proposed increases would make the cost of legal cigarettes prohibitive to the average consumer. This increase was propelling the handover of the country’s entire cigarette market to the illicit sector. Lower sales meant lower excise revenue, and this was short-sighted.
He said government had to focus on enforcing effective customs and excise administration and enforcement systems for the tobacco industry before it started looking at the excise policy. This called for immediate enforcement of the SARS production counter rules by all local manufacturers, end-to-end frequent and comprehensive audits of all manufacturers, stricter border control, ratification of the WHO protocol, and implementation of an independent track and trace system, and full enforcement of a minimum retail sales price of R28 for 20 sticks.
He concluded that as an organisation, BTFASA fully endorsed the comments made by the Minister of Finance, Mr Enoch Godongwana, that there would be no additional tax measures in the medium-term expenditure framework (MTEF) period. He also reiterated the sentiments of Mr Sibisi, that there was no fight against paying taxes, but they were pleading with government to be met halfway in order to ensure that jobs were kept, and farmers and workers had food on the table. Illicit traders should be prohibited from having the kind of access they currently had in the country, which was not extended to the legal sector.
Mr D Ryder (DA, Gauteng) asked for insights from National Treasury on what was being done to stem the flow of illicit tobacco coming into the country. What was being done specifically through SARS and working with customs officials, to ensure the flow of illicit cigarettes was cut.
Mr M Moletsane (EFF, Free State) asked if SATTA and BTFASA received any financial assistance from government, or if there was any request for financial assistance to try and save their businesses and the jobs of employees.
The Chairperson commented that the Committee took the issues raised by both SATTA and the BTFASA very seriously. Even if one job was lost, it would still be enough to be alarmed about. He stressed that across all political parties, the Committee was vigorously opposed to any job losses. Unemployment was currently at about 40%, with no sign on the horizon that there could be any improvement. There was no doubt that the organisations had the full sympathy of the Committee regarding the issues raised.
He said that there needed to be a balance of various aspects. Tobacco was a major health concern, and the Department of Health (DoH) and other departments, together with their ministers, had raised quite a few reservations about the use of tobacco and its effects on health. The reality was that no one was going to give up smoking, and there needed to be a balance from all parties concerned. Many people felt that South Africa had been socially advanced to ban tobacco smoking indoors and in some public places, and had been highly congratulated as one of the first countries to implement this. The Committee was committed to backing emerging farmers in every sphere, and they were opposed to job losses for people of all races. Given the racialisation of the country's inequalities, it was African people who mainly suffered.
He asked National Treasury about the accuracy of the highlighted 50 000 jobs lost, as well as the R8 billion less in excise collected due to the illicit trade market. He asked for an explanation of the production counter rules referred to by Mr Sibisi. He also asked how many established farmers had closed, because these farmers employed mainly African workers, and job losses would also be incurred there, so these farmers too were important to note, not just the emerging ones.
He asked to what extent National Treasury engaged in negotiations with SATTA and BTFASA before the tax bills were finalised. What reasons might have made the National Assembly Portfolio Committee not accept both the presentations made by SATTA and BTFASA?
The Committee was aware that it was the COVID -19 lockdowns that had opened the door to the illicit tobacco trade, and they were totally opposed to this illicit trade. The understanding of issues within the finance sector had since become much more sophisticated. There had been major meetings with the tobacco traders and all parties were involved, and a route was set out. He asked National Treasury if there could not be some sort of compromise. Although there was an opportunity to go to Parliament with these issues, the bills could not be changed because they were part of Section 75 legislation. This meant the provincial powers and functions were not affected, and there could only be a recommendation from the National Council of Provinces (NCOP) that there was dissatisfaction with certain issues, which they could take and forward to the National Assembly. This report would go through the necessary channels, but changes could not be made. The matter should be dealt with comprehensively, despite there being delays in the time period.
He commented that the matter should be dealt with urgency and requested that that there should be a report compiled, without any further passing of Bills. There should also be a report from the National Assembly Committee about how far the negotiations had gone. If there was no report and they brought further amendments, there should be an opportunity to defer the Bill. National Treasury should be held accountable, and come with tangible arguments.
Mr Sibisi said that SATTA did not receive any financial assistance from government. He had begun engaging the provincial Department of Agriculture to alert them of the job losses, but there had still been no assistance.
A value chain referred to all the components that produce a tobacco product. Only 90% of the leaf that was produced in South Africa was being grown by Limpopo Tobacco Processors (LTP), and the rest was not procured in the country. He said that even the Zimbabwean leaf was much cheaper. If there was a packet selling for less than R21.60, which was the minimum collectable price for cigarettes, where had the tax been paid to? He asked this to National Treasury. The playing field needed to be level. South Africa was signatory to this effect, but there had still been no changes made.
With the implementation of the R28 minimum retail price (MRP), anything selling below this amount would be considered non-tax compliant. There needed to be a price target across the board, to ensure everyone was selling according to the book. 50% of the tobacco industry was now in the hands of the illicit market. There needs to be an intense look at the value chain. The ban of tobacco during lockdown was never challenged by all relevant parties.
SATTA had started the production of tobacco in 2010 with no assistance from the government, and the farmers had been able to create a livelihood from this. Now the government wanted to take that away from the farmers and all those involved. The 8% excise, on top of the five months of lockdown, was another form of lockdown. Excise meant that the legal cigarettes were more expensive than the illicit tobacco.
The Chairperson again asked why SATTA thought the National Assembly did not agree with their submissions.
Mr Sibisi said that it was because nothing was happening. They had been called to discuss a Bill from 2018 until 2021. The National Assembly had engaged SATTA only after the five months' cigarette ban. Nothing had changed. He reiterated that farmers and the communities were suffering because of this.
Mr Tembe said that the biggest challenge had been the ban on cigarette sales, which had had a negative impact on the entire industry. There were a few black farmers who participated in this industry, which posed a challenge as they had to go an extra mile to invest more in functioning materials and equipment. The farmers now found themselves stuck with the material, as they were out of business and could not operate.
BTFASA had applied for funding/financial assistance from government, but the conversation about tobacco in South Africa was untouchable territory. He was not quite sure what exactly government was trying to achieve. The organisation had anticipated that once the ban had been lifted, they would engage with government, SARS and National Treasury, to find amicable solutions to the problem at hand. The industry was not going up -- instead it was going down. All that was needed from government was to put strict measures in place for the illicit tobacco coming from the neighbouring countries, and make sure that the laws were being obeyed. Customs and National Treasury should be asking the important question of how people were able to sell/buy these cigarettes at such a low price. BTFASA had engaged various departments, but there was no one from these departments who was willing to come on board. He said that their right to pay taxes and sustain their businesses was being infringed on.
Engagements had been taking place before the lockdown period, in 2018/19, when the illicit trade's market share was 32%, but it was currently sitting at 62% since the lockdown. What was the government doing to reduce these numbers? They were willing to work with government to at least drop the percentage to 40% and that would assist farmers to get back to business. He pleaded with the Members to assist the organisation in this regard. He also said that they were trying to minimise the nicotine in the cigarettes they produced. However, the illicit cigarettes had more nicotine, and nothing was being done to minimise this. It was posing a huge risk to society.
The Chairperson acknowledged the issues raised by BTFASA; he reiterated that there was shared empathy towards all these concerns. He said there was a concerted effort to balance the needs and interests of BTFASA, together with those of the sugar beverage tax colleagues, which were the same within the health sector. The COVID-19 lockdowns had been an unprecedented time for everyone, and it would therefore be inappropriate for him, as the Chairperson, to issue a statement under these circumstances. He understood the frustration and empathised with them. The response that the organisations get may not be to their liking, but they would receive a response. There were constitutional constraints to sort out and too many variances to balance out. A report would be issued from the Committee to state what the overall resolution was.
National Treasury's response
Ms Mputa said National Treasury empathised with the concerns and issues presented by SATTA and BTFASA. SARS would indicate the efforts made to fight the problem of illicit tobacco.
Mr Chris Axelson, Chief Director: Economic Tax Analysis, NT, said that as a department, there was a concern about the issues raised and its impact on legitimate tobacco farmers. The biggest concern from the engagements with tobacco farmers and producers was always around the illicit trade. This matter really needed to be squashed through improved enforcement. An extra R3 billion budget had been allocated to SARS for this purpose. Quite a lot had been done in this regard. New procedures had been put in place and new staff had been allocated to check on the manufacturers of tobacco. Industry had welcomed these efforts, and there was some level of work being done. He said that excise policy should not be viewed as a means to counter this. Excise duty should not be reduced to try and avoid illicit trade.
The Quarterly Labour Force Survey (QLFS) did not indicate the amount of 50 000 job losses mentioned in the presentation. When looking the R8 billion loss in excise, the numbers could be much larger. The number of established farmers that had closed was currently unknown. National Treasury had noted the minimum collectable price of both BTFASA and SATTA. There had been discussions about this, and the concern was that if there was a minimum collectable price, all the cigarettes would go up to that price and therefore it would be more difficult to differentiate which producers were clearly illicit and which ones were not. The illicit traders would get a bigger jump in revenue. There had been engagements with the industry, and National Treasury was willing to meet with SATTA and BTFASA.
He said that the excise increase had been in effect for most of this year, since the Minister announced it in the budget report. Negotiating with the industry about this tax issue was quite difficult at times, as there were various other stakeholders that needed to provide input before they came back with a report.
The Chairperson said he did not expect that the announcement of increases in excise taxes would immediately mean negotiating the amounts. There were broader structural challenges that needed to be addressed. He was not expecting the National Treasury to do something immediately about the issues raised. His suggestions would be drafted into a document, and the legal services unit would assist and figure out if the way excise laws and customs were dealt with contravened any other legislation.
Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, NT, addressed the issues around excise policy and how it was increased on an annual basis. National Treasury used a policy framework as a guideline to adjustments of the excise rate every February. The current policy set the targeted incidence that had been referred to previously, at 40% of the price of the most popular brand (Peter Stuyvesant). What had been observed was that over the past three years, the price of this brand of others had not been increased to reflect the total increase in the excise. This had pushed the excise share of the price to 45%, which was above the 40% policy framework put in place. Peter Stuyvesant had not kept up with the pace of the excise increase.
The circumstances around COVID-19 which had resulted in the growth of illicit trade market was a major concern. This worked against the health efforts being made during this pandemic, because this market was not regulated, therefore exposing consumers to the hazardous effects of these tobacco products. When the excise increase was considered in February, there was a look at the fiscal framework. In many other years, there had been quite a lot of increases in many of the tax instruments, but in the past year there had not been many increases. This was due to the limitations they imposed in raising revenue. All of this was taken into consideration when looking at the portfolio of tax instruments that exist and the government's requirements. The decision to implement the 8% increase was taken within this context.
The issue put forward by the farmers was that the illicit trade was crippling their businesses, and they had no issue paying the excise taxes. SARS had put much effort in ensuring that the illicit trade unit was well equipped to deal with the issues surrounding the illicit trade market, and there were quite a few products that this unit focused on. It had done a lot of confiscation and clamping down on illegal operations.
National Treasury was considering the issue of a minimum unit price. It was alarming that there were packs of cigarettes on the market being sold at a lower price than the excise and value-added tax (VAT) on tobacco products. NT was looking at how to incorporate this policy instrument into the policy framework. It would assist in terms of the affordability of tobacco products if there was a minimum unit price that was much higher, and which covered the excise and VAT. He commented that implementing a minimum unit price would not mean that everyone who charged this price was tax compliant. A lot of work needed to be done to ensure that this tax instrument was complemented by other measures.
There were also legal implications involved in implementing a minimum unit price that needed to be considered. National Treasury had announced in the February budget that there would be a review of the policy framework for tobacco products. There would be a discussion with the relevant stakeholders on a way to deal with the issues raised.
Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, said SARS took the illicit trade of tobacco very seriously. A media release indicated the amount of tobacco products that had been seized and destroyed, and factories that had been uncovered, closed and liquidated. He admitted that indeed more work could be done, and more was being done through various processes. The presentations may be a little out of date because production counters were currently being enforced, and there were penalties being imposed. He had received some correspondence indicating dissatisfaction with the penalties that had been imposed, and those would be handled through the relevant channels.
Commenting on the issue of the minimum price, he said SARS was aware through research that illicit traders thrived on this, as it was a way of increasing profits.
Mr Legote referred to the ratification of the WHO protocol on illicit trades, and said the Department of Health was the lead department for ratifying these processes. It was aware of the urgency of the matter, and hopefully they would be coming to Parliament in this regard.
Mr Moletsane said that although the black emerging farmers had indicated that they applied for funding, they still did not receive it. A budget had been put aside for business rescue during the COVID-19 pandemic, but it still seemed that both SATTA and BTFASA were unclear about the reasons leading to the rejection of their plea for financial assistance. He asked National Treasury to clarify what circumstances had led to funding for these farmers not being approved.
Mr Ryder noted that there was no direct line to report the illicit trade in cigarettes. It would be in the interest of legitimate cigarette traders to have access to this information, perhaps on cigarette boxes. This process would create cooperation with the customs and excise authorities. Cutting off the supply would make it more difficult. There would be better scope by working together. It would benefit everyone to get rid of the illicit trade.
The Chairperson echoed the sentiments shared by the Committee Members, and handed back to National Treasury for a response.
Ms Mputa said that unfortunately NT's focus for this presentation was tax policy, and they could not provide any answers regarding the request for financial assistance and why it had not been granted. She suggested SATTA and BTFASA could submit letters, and the NT's relevant units would respond accordingly.
The Chairperson indicated that this submission of letters should be done as soon as possible. National Treasury should be held accountable if it did not happen by February next year.
Ms Mputa said that SARS may be able to respond better on the issue of reporting lines.
Mr Tomasek said that the suggestion made may have been slightly different. It seemed that it was more along the lines of a clearing house amongst the tobacco industry, where reports could be consolidated and reported to SARS. He said there was a fraud line with details available on the website, but it was not geared to the illicit tobacco trade. Streamlining this process may be a little bit problematic, as the reports would be about every little garage or store that sold these illegal cigarettes. A clearing house made much more sense, as it ensured that measures to deal with these issues were urgent.
The Chairperson asked if there was a way to keep the details online, and somehow connect the illicit tobacco reports
Mr Tomasek responded that it was possible, but the problem lay in 20 000 reports of illegal packs of cigarettes, and the reports about more pressing issues were lost in that volume. There could be an attempt to make use of artificial intelligence to overcome this.
The Chairperson suggested that the door should be kept open to what the Committee was suggesting, and to think about the logistics of it all.
Mr Ryder confirmed what he had meant, in the sense that this reporting line would create the ability to catch the chain that dealt in illicit cigarettes. He suggested the creation of an app.
In closing, Mr Sibisi said that he appreciated the attitude of the Chairperson in dealing with these issues, and he hoped that actions would truly be louder than words.
Mr Tembe echoed these sentiments, and closed off by saying he appreciated the contributions made by the Committee and all the departments present in the meeting. They hoped that all the resolutions would be in the interest of creating jobs and restoring the livelihoods of black farmers.
The Chairperson said that it was the work of the Parliament to ensure that thorough work was being done. It was the "People’s Parliament," and the Committee was a custodian of it. Action needed to take into account all the points raised. It was not enough for civil society organisations to present before Parliament and expect results overnight. A democracy was alive only when people put pressure on Parliament. He pleaded with SATTA and BTFASA to continue doing their work, and not to give up.
He suggested that the Committee should consider finishing dealing with the Bill the following day.
The meeting was adjourned.
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