Illicit Trade: Cigarettes

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March 2024

South Africa: A new study1, from the University of Cape Town, reveals that illicit (cigarette) trade incidence in South Africa was 58% in 2022 – up from 5% in 2009 and down from its peak at 60% in 2021. Legal cigarette market account for 14.3Bn sticks in 2022 – against 19.4Bn illicit sticks. In 2022 alone, the South African Government lost R15Bn in excise and R3Bn in VAT due to the illicit trade (1% of the governmental revenue).

Two events led to the explosion of illicit trade:

– The five-month ban on tobacco sales in 2020 during Covid

– The reduction of capacity at Revenue Service (responsible for excise tax collection) from 2014 onward.

The market leader, BAT, claims that illicit cigarette sales now accounts for about 70% of the market. Accordingly, BAT South Africa (BATSA) is set to further scale down its supply chain operations. In 2019, BATSA permanently employed around 1,800 people. Since 2020, the Company has been forced to decrease its workforce by more than 30% after losing ~40% of its sales volume to illicit trade.

Feburary 2024

Malaysia: In Q4 2023 Earnings release, BAT stated that illicit trade incidence in Malaysia remained persistently high at 55.6% of the tobacco market in 2023. BAT urges the Government to implement the measures announced in the Budget 2024 as soon as possible to combat the illicit trade and refrain from regulations that would fuel the further growth of the illicit tobacco trade and the development illicit e-vapor trade.

September 2023

Australia: It is reported that the Australian Border Force seized just under a billion illegal cigarettes worth A$1.1Bn in forgone tax over the past two years2 – as the average price of a pack of 25 cigarettes is set to go from A$40 to A$50 within four years.

Background

The World Health Organization (WHO) defines “illicit tobacco trade” as “any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity”.

The most common form of illicit tobacco trade for cigarettes are:

– Contraband: genuine cigarettes that have been bought in a low-tax country and which exceed legal border limits or are acquired without taxes for export purposes, to be then illegally re-sold in a market with higher prices

– Counterfeit: cigarettes manufactured without authorization of the rightful owners and with intent to deceive consumers and to avoid paying duty.

References:

  1. Illicit cigarettes account for nearly 60% of the SA market – Moneyweb ↩︎
  2. https://www.afr.com/politics/federal/billions-in-taxes-being-lost-as-illegal-tobacco-booms-20230912-p5e3x0 ↩︎

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