Business

Tobacco industry edgy over ‘sin tax’ review

2016-02-28 15:00

The tobacco industry “has no idea” what Treasury is planning after a review of the tobacco “sin” excise tax was quietly ­announced in this week’s Budget Review.

The Tobacco Institute of Southern Africa welcomed the low increase in sin taxes for now, which keeps the “52% total tax incidence” system in place.

Since 2002, the tobacco industry, not government, has been responsible for steep increases in the sin tax.

The current system simply sets the tax burden (including VAT) at 52% of the “recommended retail price” of the most popular brand.

That is said to be British American Tobacco’s Peter Stuyvesant brand, which has 30% or more of the market.

British American Tobacco has in effect – and indirectly – been setting the “sin tax” on cigarettes.

This has worked for government because major companies, of which British American Tobacco is by far the largest, were ­aggressively pushing prices higher until about 2010. This caused the tax revenue on cigarettes to balloon from R4 billion in 2002 to R13.1 billion in the current financial year.

That’s with the number of cigarettes sold in the country more or less stagnant.

However, things have changed.

When prices do not get hiked, the sin tax only goes up by the inflation rate – as it did in the Budget Review this week.

This allows Treasury to “protect its revenue in case there is a sudden decrease in the price of cigarettes”, said Corne van Walbeek, principal investigator of the Economics of Tobacco Control Project, which is based at the University of Cape Town.

“This could happen if there is a price war, for example. As it is, the tobacco industry has been in somewhat of a price war against the small operators since 2010 and has increased ­cigarette prices by more or less the inflation rate, not much more,” he added.

“This is very different from the period before 2010, when the tobacco industry aggressively increased the retail prices, and Treasury did not have to use the second principle [inflation rate] to increase the prices.”

Francois van der Merwe, chair and CEO of the Tobacco Institute of Southern Africa, said he could not speculate about what Treasury wanted to achieve by reviewing the system.

“We expect they will approach us in the course of the year. We have trust in Treasury; they have been very sensible.

“We believe the state should protect the tobacco industry. It in effect has a 52% share in it,” said Van
der Merwe.

The World Health Organisation advocates a 75% tax burden and “it would be logical” if Treasury was looking at pushing the local 52% burden higher, he added.

If that was so, it would simply drive more of the tobacco market out of the tax net through illegal cigarette sales, he claimed.

The promised review will include e-cigarettes, meaning that the nascent industry may soon find itself taxed to the hilt as well, eroding its competitiveness against regular tobacco ­cigarettes.

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November 18 2018