Taxes and Legitimate Profits up in Smoke

By Michael Gregson | Published: 2:00 AM Jul 2 2020
Focus Taxes and  Legitimate Profits up in Smoke

By Michael Gregson

Many in Sri Lanka applauded when South Africa banned cigarettes in response to the COVID-19 outbreak – and called for similar action here. But be careful what you wish for in case it comes true. 

The illegal trade in cigarettes has boomed in South Africa since the ban came into force in March – despite an anti-smuggling fence being erected on the border with Zimbabwe. But apparently it has been little or no hindrance to the illegal tobacco business. 

Smugglers have been crawling through the fence and sneaking across particularly porous sections of the border.

From Zimbabwe, there are more than 200 illegal entry points into South Africa, where cigarettes are being sold from under the counter in shops or from people’s homes, with WhatsApp groups being used to market the business. Sound familiar?

“We have arrested a number of people in connection with the smuggling of cigarettes. They are taking advantage of the porous borders and we have confiscated contraband,” South African Police Service Spokesman, Brigadier Motlafela Mojapelo told The Guardian.

South Africa loses US$ 500 million

According to the Tobacco Institute of Southern Africa, the illegal cigarette market cost South Africa US$ 500 million in lost taxes last year, and more than US$ 2.5 billion since 2010.

Peter, 38, who has been selling illegal cigarettes for more than five years, said the South African ban had presented a huge opportunity for many in the business.

“I cannot miss this opportunity to make more money. I have customers in many parts of South Africa who need my stuff. I am even failing to meet the demand, these are exciting times,” he told The Guardian. “I have been caught once, but such is life and there is money to be made. South Africans like our cigarettes because of the quality ... and high nicotine,” Peter said.

A recent study by the University of Cape Town researchers showed 90 per cent of smokers had bought cigarettes during the lockdown. Smokers who could not buy their usual brands had access to other new brands on the market, from Zimbabwe, Mozambique, Angola, the Democratic Republic of the Congo and China.

Similarly in Sri Lanka, I don’t know any smokers who gave up during the island-wide curfew. People had their sources, often cigarettes smuggled from overseas. The fact that Sri Lanka is an island should make smuggling more difficult – especially now that hardly any flights are arriving. 

But there is plenty of evidence that foreign cigarettes are still widely available – despite being banned for years – and what’s more they are usually cheaper than the legal home-grown brands sold by the Ceylon Tobacco Company. An informal straw poll among smokers revealed that foreign smuggled cigarettes are around Rs 500 cheaper for a packet of 20 than their legal counterparts.

Foreign fags

There is plenty of anecdotal evidence on the availability of foreign fags. Recently, there were newspaper reports about two Police Constables who were arrested in Colombo Fort for allegedly possessing 42 cartons of illicit cigarettes, valued at more than half a million rupees. 

The raid was conducted near the Junior Police Officers Mess in Pettah following a tip-off.

Investigations revealed a Constable attached to the Colombo Harbour Police and a driver of Police Kennels Unit at Colombo Harbour were transporting 8,400 illegal cigarettes – in a van belonging to the Colombo Harbour Police Kennels Unit. The trade in smuggled cigarettes is obviously profitable enough to lead to the corruption of Police Officers – and is undermining the local economy. But perhaps that is as a result of the high price of smoking in Sri Lanka.

In a report published at the end of May, the Ceylon Tobacco Company said Sri Lanka is the most expensive country in the world for legal cigarettes, based on the purchasing power parity of local consumers. 

CTC Managing Director and CEO Nedal Salem told shareholders that the tax hikes by the Government on cigarettes in two occasions last year led to the average price of a cigarette to go up by a record 17 per cent. 

“Despite accounting for only 31 per cent of the tobacco market, the company contributed nearly 97 per cent of revenue from tobacco-related taxes and levies,” Salem said.

The illicit cigarette market in Sri Lanka has estimated to be grown by 45 per cent during the year, resulting in a loss of Rs 21 billion in government revenue, as per CTC estimates.

So, just imagine the money that would be made by smugglers and lost by the Government if Sri Lanka actually followed South Africa’s example and completely banned tobacco. 

By Michael Gregson | Published: 2:00 AM Jul 2 2020

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