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Measures by the revenue authority to curb illicit cigarette trade

Anti-forestalling rules and draft rules on installation of CCTV cameras at tobacco warehouses

Published: 03 February 2022

Commonly known as ‘sin taxes’, the South African Revenue Service (SARS) has been religiously collecting the excise duty that is derived from the manufacture, importation and distribution of tobacco, and tobacco products such as cigarettes for a long time. The current Customs and Excise Act (which imposes these duties) came into effect in 1964. This contribution is so important to the fiscus that the revenue service has formulated specific rules to deal with the financial leakages that occur in the industry caused by illicit trade and in general, tax avoidance. In this article we touch on the two measures that SARS has put in place to try and limit duty losses in the tobacco and cigarettes industry.

Anti-forestalling rules to secure higher margins in excise collection

It was April Fools Day when on 1 April 2021, SARS gazetted rules imposing restrictions on clearing a large volume of cigarettes in the run up to the National Budget Speech, before the excise duty rate increase. It is hoped that the restrictions imposed will be successful in controlling the amount of forestalling that has become a practice in South Africa. South Africa is not a pioneer of anti-forestalling regulations. The imposition of restrictions on the clearance of cigarettes was imposed by Her Majesty’s Revenue and Customs, United Kingdom back in 2014. The South African anti-forestalling rules have been inserted in Section 58A of the Customs and Excise Act, 91 of 1964. The rules do not define what forestalling is, however. An ordinary meaning of forestalling is the act of “pre-empting” or “anticipating” something and acting before that anticipated event occurs.

The anti-forestalling rule is one of the few mechanisms that SARS is trying to implement to reduce tax avoidance and collect as much duty as possible from cigarettes. Why is this anti-forestalling rule only applicable to cigarettes? Cigarettes are viewed as one of the most high-risk commodities that SARS must deal with due to several factors including illicit trade. Over the years, it has been a practice that manufacturers and importers of cigarettes clear a significant volume of product before the National Budget Speech is delivered in order to pay the lower rate of duty. 

The rules require importers and manufacturers of cigarettes to clear a specific number of cigarettes for home consumption during what is called “a controlled period”. This period commences on 1 December each year, and ends on the date of the National Budget Speech delivered by the Minister of Finance during the second half of February yearly.

The number of cigarettes that can be cleared for home consumption is calculated using a specific formula. According to this formula, an average per year preceding the controlled period must be calculated which is the number that must be entered for home consumption. There are instances where the importer or manufacturer might need to clear more products than the calculated total. In such instances, the manufacturer or importer must apply to the SARS Commissioner for permission. The conditions for such an application are stated in the anti-forestalling rules.

The rules further make provision for new entrants in the market. New entrants are manufacturers or importers of cigarettes who start entering such goods for home consumption 30 days or less before the start of a controlled period, and therefore will have no average for a previous year. This is a welcome change as it might assist in curbing illicit trade which impacts negatively on the viability of legitimate business.

This action by SARS is likely to be considered for other commodities, such as alcoholic beverages. When that will happen remains to be seen.

SARS at the forefront of fighting illicit trade

According to the study titled “Illicit cigarette trade in South Africa: 2002–2017”, ‍‍ the illegal cigarette market in South Africa is a multi-billion Rand industry which cost the South African taxpayer more than R8 billion in lost taxes in a year, and more than R40 billion since 2010.

The revenue service is in the forefront of fighting the illicit trade within the tobacco industry. The latest intervention is the introduction of Rule 19.09 to the Customs and Excise Act. According to this rule, SARS will install (at its own cost) Closed-circuit Television (CCTV) cameras in all the manufacturing and storage warehouses of tobacco.  This rule is still at its draft stage but will take effect from 1 June 2022.

The move to install these CCTV cameras was introduced by the need to regulate and account for every single product manufactured and imported upon which duty must still be paid. The revenue service is empowered to install the CCTV cameras by virtue of these warehouses being licensed as customs-controlled areas in terms of the customs and excise legislation. This means that as a condition for a license, the applicant must grant SARS officials uninhibited access to the warehouse in order to install CCTV cameras.

On premises that have already been licensed, the licensee must allow the officials into the premises to install CCTV cameras. Failure to do so will lead to SARS suspending or cancelling the license where such has been granted and where there is still an application pending, such a license will not be granted. CCTV cameras will be installed in such a way that the manufacturing, storing and loading of tobacco (and tobacco products) will be captured by the CCTV camera.  According to the draft rule on CCTV cameras rule; no one can obstruct, temper or manipulate the CCTV camera. Doing so will invite a fine not exceeding R50 000 and/or up to two years’ imprisonment.

In conclusion, it is suggested that clients that trade in the tobacco and cigarette industry take time to understand the rules and ensure that all records pertaining to the manufacture, importation and distribution of their product are kept in the correct condition.

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