The Heavy Burden of Tobacco Use in South Africa.

The Heavy Burden of Tobacco Use in South Africa.
Tobacco use is a health and economic burden in South Africa, with smoking costs estimated to be 0.97% of GDP. Tobacco tax increases can reduce use, yet illegal trade presents challenges.

Tobacco use has brought heavy health and economic burdens to countries. Research estimates that smoking costs South Africa 0.97% of its GDP in 2016. These costs may increase due to an observed increase in smoking rates over the past five years.

In 2021, South Africa conducted its first-ever global adult tobacco survey. The survey was a nationally representative household survey aimed at monitoring tobacco use among adults aged 15 and above. According to the survey results, 25.8% of the South African population (11.1 million adults) currently smoke. This is significantly higher than the estimate of 19.9% from the most recent nationally representative income dynamics study conducted in 2017. Tobacco use is associated with numerous diseases, including cancer.

Research shows that a method for reducing tobacco use is to continuously and gradually increase tobacco consumption tax. The increase in tax must continue over time and be adjusted at least annually. These tax increases should be significantly higher than the inflation rate in order to have a meaningful impact on the affordability of tobacco products. Reducing the affordability of tobacco products will ensure a significant reduction in tobacco use.

One of the key challenges of this strategy is the spread of illegal tobacco trade in the country. Independent research shows that by 2021, illegal cigarette sales will account for a staggering 54% of the entire market. Illegal cigarettes are relatively cheap because they can avoid taxation, making them more affordable and increasing smoking rates.

The tobacco industry in South Africa and globally is persistently trying to convince policymakers that increasing tobacco taxes will lead to an increase in illegal trade. This argument is self-serving and lacks reliable research support.

In fact, South Africa's own tobacco tax revenue data shows that significant increases in consumption taxes can be made without worsening the illegal market. The country faces a dual but unrelated issue in tobacco use. First, the government's tax increases on tobacco consumption are too low. Second, the illegal tobacco market is thriving. To address these issues, the government must increase tobacco taxes more quickly to reduce their affordability and strengthen enforcement to reduce the presence of illegal tobacco products in the market.

Consumption tax

Between the years 1994 and 2009, the consumption tax on cigarettes in South Africa, adjusted for inflation, increased fivefold. This caused the actual retail price of cigarettes to almost triple.

Between 1994 and 2012, these price increases and other factors, including the introduction of tobacco control legislation, caused smoking rates in South Africa to drop from approximately one-third of the population to less than one-fifth.

A peer-reviewed study examining the trends in illegal trading in South Africa from 2002 to 2017 has found no evidence to suggest that there was an increase in the black market during the 1990s and early 2000s when taxes on cigarette consumption rose rapidly. Instead, the study indicates that illegal trading in cigarettes only became a significant issue for South Africa from 2009. The illegal market grew from less than 5% in 2009 to around 17% in 2014, increasing to over 30% in 2017.

During this period, the actual consumption tax on cigarettes remained relatively stable after adjusting for inflation. This fact dispels the tobacco industry's argument about the link between tobacco taxes and illegal trade in South Africa.

The rapid growth of illegal trade from 2009 to 2017 can be attributed to the weakening of the tax department's investigative capabilities. Between 2014 and 2018, the department disbanded a specialized unit created for investigating the tobacco industry.

Under new leadership, the tax bureau established an illegal economic department in early 2019. As a result, there was an increase in the quantity of tobacco taxed and consumer taxes collected in the 2019/2020 fiscal year.

Unfortunately, the government's 20-week tobacco sales ban implemented in 2020 has set back the progress. Studies show that the ban has led to manufacturers and traders operating in completely illegal markets for the long term, thus strengthening the illicit market. During the sales ban, most cigarettes were sold through informal retail stores.

Illegal trade has led to a decrease in tobacco prices and directly increased tobacco consumption. It also undermines non-tax policies aimed at reducing tobacco use. The Cabinet recently approved the 2018 Tobacco Products and Electronic Delivery Systems Control Act, which includes introducing plain packaging and graphic health warnings for all tobacco and nicotine products. These policies have been proven effective in reducing smoking initiation and encouraging cessation.

However, if cheap illegal cigarettes are easily available, their effectiveness will be greatly reduced.

Illegal trade.

Illegal trade involves criminals and money, and can only be addressed through effective law enforcement mechanisms, including measures to protect the tobacco supply chain. Despite repeated calls from civil society organizations, the South African government has yet to approve the Protocol to Eliminate Illicit Trade in Tobacco Products.

If South Africa ratifies the protocol, the country will be committed to implementing measures that have been proven to reduce illegal trading of cigarettes. These measures include adopting independent tracking and tracing technologies, separate from the tobacco industry, as well as licensing agents in the tobacco supply chain.

Illegal trade has significantly reduced government revenue. The ban on tobacco sales provides an extreme example of how serious these revenue losses can be. During the 20-week ban on sales, the government lost approximately 6 billion lant in consumption tax from cigarette sales alone. Most, if not all, tobacco companies continued to produce and sell cigarettes during the ban period without paying consumption tax on those sales.

Recent media reports have documented the investigation by the tax authority into Golden Leaf Tobacco Company. This move is seen as a positive step towards addressing tax evasion issues among cigarette manufacturers, and may serve as a deterrent for other tobacco companies to comply with tax regulations.

However, considering the scale of South Africa's illegal trade problem, more work needs to be done. It is crucial for the government to approve and implement the provisions of the Protocol to Eliminate Illicit Trade in Tobacco Products. Meanwhile, the Treasury must significantly increase tobacco consumption taxes annually to deter tobacco use in South Africa.

Immediate action.

The Ministry of Finance should implement a strategy to increase tobacco consumption tax by a pre-announced percentage (e.g. 10% higher than the inflation rate) over several years.

Australia and the Philippines, along with other countries, have proved that the long-standing tobacco taxation strategy gradually reduces the affordability of tobacco products over time. This has improved public health outcomes and increased government revenue.

This measure will align South Africa's tobacco tax strategy with the recommendations of the World Health Organization's Framework Convention on Tobacco Control, an international treaty that calls on signatory countries to implement policies to reduce demand for and supply of tobacco products. South Africa ratified the treaty in 2005 but has yet to implement its recommendations on best tobacco taxation policies. By doing so, the government will avoid missing out on much-needed additional revenue and opportunities to save lives.

2FIRSTS will continue to track and report on this topic, with further updates available on the '2FIRSTSAPP.' Scan the QR code below to download the app.

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