REEP members publish paper on illicit trade in South Africa

20 Nov 2019 - 12:45

In November 2019, Kirsten van der Zee, Corné van Walbeek and Sibahle Magadla published a paper titled "Illicit/cheap cigarettes in South Africa", in the journal Trends in Organized Crime. They found that approximately 30% of cigarettes bought in 2017 were purchased at a price of R20 per pack or less. Given that the sum of excise tax and VAT at the time was R16.30 per pack, these cigarettes are likely to be illicit.

The paper uses wave 5 of the National Income Dynamics Study (conducted in 2017), to estimate the size of the illicit market for cigarettes in South Africa. Prices are used to determine the legal status of cigarettes purchased by respondents. Since the sum of the excise tax and VAT in 2017 amounted to R16.30 (1.22 USD) per pack, any cigarettes selling for R20 (1.50 USD) per pack or less are likely to be illicit, assuming reasonable production costs.

By this definition, we found that approximately 30% of cigarettes consumed in South Africa in 2017 were illicit. Illicit cigarettes were found in substantial quantities across all nine provinces. At the margin, the purchase of illicit cigarettes is associated with lower socio-economic characteristics, such as having lower levels of income and education. This study comes at a key time, when arguments about the size of the illicit market has received much attention by the tobacco industry and academics.

The paper also comes at a time when the South African Revenue Service has been in the spotlight. In 2018, retired judge Robert Nugent led a commission of enquiry into tax administration and governance at SARS, and the tobacco industry and the illicit trade in cigarettes featured prominently in the reports from the commission. As illicit cigarettes undermine both the fiscal and health agendas of tobacco taxation policy, our results highlight the need for the South African government to implement effective measures in order to curb illicit trade.

Read the full article here.