Illicit Trade of Cigarettes in South Africa

Many countries have successfully increased tobacco taxes without illicit trade increasing.

Strong enforcement and an independent track and trace system are the most effective ways to combat illicit trade.

The illicit trading of tobacco products is the supply, distribution, and sale of smuggled genuine, counterfeit, or cheap white tobacco products. This page defines the various types of illicit tobacco trade in South Africa, discusses the overall level of illicit trade, and presents estimates of the level of illicit trade within South Africa. Finally, myths promulgated by the tobacco industry are examined and addressed, and suggestions for methods to reduce illicit trade presented. Success stories from other countries are also highlighted. 

To learn more about the data and methods used in this page click here.

The illicit tobacco trade has increased markedly since 2010.

In the early 2000s, the illicit trade in cigarettes was estimated at below 10% of South Africa’s total cigarette market. Between 2005 and 2009, the South African Revenue Service (SARS) focused much attention on illicit tobacco trade, and mobilised specialised enforcement units to shut down a number of illicit tobacco manufacturers.

However, in the 2010s, and especially since 2015, illicit trade rose sharply, largely due to the entry of smaller, local producers and weakening enforcement capacity at SARS. By 2017 illicit tobacco consumption was estimated to between 30-35% nationally (no statistically significant differences in illicit tobacco consumption were found between provinces). In 2021, illicit tobacco consumption had risen further, to 54%. This rise in illicit consumption followed South Africa’s ban on tobacco sales which was part of national COVID-19 lockdown measures. Read more here.

54%

The estimated percentage of illicit trade in
South Africa in 2021

Illicit Tobacco

Products


Contraband

These tobacco products are produced legally but the applicable taxes, duties, and fees are not paid before they are to the consumer, making them illicit. The diversion of supply from manufacturer to licensed retailer can occur via bootlegging or large-scale smuggling operations.

Most of the illicit cigarettes smoked in South Africa are produced locally in legal facilities.

Counterfeit

These tobacco products are illegally produced and have fake manufacturing labels and trademarks. These products infringe intellectual property rights, they may not pass health regulations, and the appropriate taxes are not paid. Counterfeit cigarettes are relatively rare, estimated to make up just 2% of global illicit cigarettes.

Cheap Whites

These tobacco products are produced legally but for the sole purpose of being exported and illegally sold in another market where they are not legal. They may not meet the destination country’s health standards and the appropriate taxes are not paid in the destination country (though in some cases the appropriate taxes are paid in the country of production). These are also sometimes referred to as ‘illicit whites’ or ‘off-brand’.

Loose tobacco

Loose tobacco refers to the tobacco used to manufacture cigarettes. If the appropriate taxes are not paid or the appropriate health checks not conducted on the loose tobacco, it is deemed illicit.

Tobacco Tax

Types


Import Duties

Tax levied on selected imported goods destined for local consumption (i.e. not in transit).

VAT

Tax levied as a percentage of the value of many different products (in South Africa the VAT rate is 15%), aimed at raising revenue.

Excise Taxes

Taxes typically levied on specific products, like tobacco, alcohol and, recently, on sugar-sweetened beverages in South Africa, with the primary aim to discourage their consumption.

Excise taxes are typically levied as:

  1. Specific excise tax: Monetary value per quantity (e.g. pack/piece/weight);
  2. Ad valorem excise tax: Levied as a percentage of the product’s value.

Illicit Tobacco

Supply Methods


Production at illegal facilities

Cigarettes and other tobacco products are manufactured at illegal facilities. These cigarettes may not meet health and packaging regulations. Counterfeit cigarettes infringe intellectual property rights. No excise tax or VAT is paid on these products.

Production at legal facilities

i. Under-declaring: Manufacturers produce more than they report to the tax authorities. These cigarettes are sold in South Africa without paying excise duties and VAT.

Under-declaring production is a well-known tactic used by tobacco producers globally. For instance, “(f)actories in South Africa operate double shifts, running their machines at night, and/or they hide the true scale of their production by paying off customs officials and using fraudulent paperwork. They make use of all the available gaps in SARS’s monitoring of their ‘bond’ warehouses, for example reusing invoices for multiple deliveries.”

ii. Ghost exports: Manufacturers declare some production for export, exempting them from excise duties and VAT. These products are instead diverted to the South African market without paying tax.

Illicit Tobacco

Import/Export


Smuggling

Products are illegally traded across borders without paying taxes. Both legal and illegal tobacco products can be smuggled. They are brought into the country at both legal and illegal entry points without paying import duties and are then sold without paying excise duties or VAT. These products may or may not meet health or other legal requirements.

Bootlegging

Small-scale smuggling where an individual purchases cigarettes in one country, where the taxes are low, and sells them in another country where taxes are higher.

In Transit

Tobacco products are produced for export by a legitimate manufacturer but are smuggled to a different country en route without paying any tax.

The illicit tobacco market is a global problem and requires a global solution. There are global strategies in place, such as the World Health Organization’s (WHO) Framework Convention on Tobacco Control and WHO Protocol to Eliminate Illicit Trade in Tobacco Products,

which are essential in the fight against illicit tobacco.

The Protocol to Eliminate Illicit Trade in Tobacco Products aims to eliminate all forms of illicit tobacco trade, in accordance with the terms of Article 15 of the WHO FCTC. The Protocol was developed in response to the growing international illicit trade in tobacco products. It provides tools for preventing illicit trade, such as an international track and trace system, law enforcement measures, and international cooperation. Track and trace systems in particular have been identified as key to combating illicit trade.

South Africa was one of the first countries to sign the Protocol in 2013, but has not yet ratified it. Ratification is important because it legally obliges the country to implement the provisions of the protocol.

Recommended Approaches

to Combating Illicit Trade in South Africa


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MYTH: An increase in taxes leads to an increase in illicit trade.

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FACT: Independent research shows that increasing tobacco taxes does not necessarily increase illicit trade.

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MYTH: Illicit cigarettes are only manufactured by local South African companies.

myth fact icon

FACT: Both local and international companies contribute to the illicit tobacco trade in South Africa.

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MYTH: Illicit trade occurs primarily in the townships of South Africa.

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FACT: Buyers of illicit tobacco products can be found throughout the country.

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MYTH: The tobacco industry provides reliable data.

myth fact icon

FACT: The tobacco industry consistently produces unreliable data and frequently fails to state the source or research methodology.

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MYTH: Codentify/INEXTO Suite is an established and effective alternative to track and trace systems.

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FACT: Codentify/INEXTO Suite is not a true track and trace system and cannot be relied on because it is owned by the tobacco industry.

Kenya’s Track and Trace System increased excise tax revenue.

Kenya implemented a track and trace system in 2013, resulting in a 20% increase in excise tax revenue between 2013 and 2016.

The Kenyan Revenue Authority estimates that the illicit cigarette trade market share declined from 12% in 2013 to 5% in 2016, a direct result of the implementation of track and trace measures.

Georgia decreased the size of the illicit tobacco market (while increasing taxes).

In Georgia, almost 50% of cigarettes sold between 2000 and 2010 were illicit. Georgia successfully implemented progressive economic reforms in its Revenue and Customs services, including requiring tax stamps on all tobacco products. Currently these are only used for tracing, though they have the capability of being used for both tracking and tracing.

As a result, illicit cigarette consumption fell to 1.5% of total consumption in 2018. This reduction in illicit consumption coincided with significant increases to Georgian excise taxes.

Romania improved tobacco-control enforcement and reduced illicit trade.

In early 2010, 19% – 30% of tobacco in Romania was purchased on the illicit market. To combat this, Romania took steps to improve the enforcement of tobacco-control policies. In the first phase, from 2010 to 2012, they aimed to:

• create a better legislative framework;
• strengthen the administrative capacity of Customs; and
• focus on specific and more effective controls to curb cigarette smuggling.

By the end of 2013, the size of the illicit market had decreased to 11.4% of the total market.

Brazil brought down illicit cigarette consumption through a combination of legislation and technology.

During the 1990s, Brazil’s cigarette exports increased 8000-fold but the majority of exported cigarettes found their way back to Brazil as contraband. Brazil initially dealt with this by imposing an export tax of 150% on cigarettes sent to neighboring countries, a measure that successfully reduced the prevalence of contraband cigarettes. However, tobacco companies sued the Brazilian government, on the grounds that the export tax was against free-trade legislation, and won the lawsuit, overturning the export tax.

Between 2000 and 2006, the Brazilian government kept excise taxes low in order to out-compete illicit products by motivating the legal production and supply of cheap cigarettes. This did not work, because cigarette manufacturers did not lower their prices but instead benefitted from the low tax environment. In 2007, realising that their tax policy was not working, the government began to raise excise taxes by more than inflation, and imposed a minimum price per pack. In addition to changing its tax policy, Brazil mandated the licensing of its manufacturers and introduced a track and trace system.

The increase in excise taxes increased cigarette prices, reduced both legal and illegal cigarette consumption, and increased tax revenue. The track and trace system exposed seven manufacturers’ engagement in illicit activities and led to their closure.