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Illicit tobacco trade costs SA R1bn a year, hits producers
April 30, 2010
By Florence de Vries
Illegal trade in tobacco products is stealing market share from cigarette and tobacco producers such as British American Tobacco (BAT) and costs the government R1 billion in lost revenue every year, according to the SA Revenue Service (Sars).
"Illicit tobacco trade equates to a revenue loss of about R1.4bn a year for the legitimate tobacco industry. Of this, the loss to government amounts to R1bn. This is not only in terms of fiscal costs, but also in terms of the health of the community," Sars customs spokesman Sibabalwenathi Mfabe said.
Meanwhile, from a corporate perspective, in his opening speech at BAT's annual general meeting this week, chairman Richard Burrows warned that cigarettes were "probably the most smuggled legal product in the world" and said that organised crime was becoming increasingly involved.
According to Burrows, the global cigarette industry loses between £3 billion (R34bn) and £6bn annually in revenue to the illicit trade, which undermines brands and jobs in the legitimate industry.
"Anything up to 660 billion cigarettes a year pass through the hands of counterfeiters, smugglers and local tax evaders worldwide," Burrows said.
In its interim statement yesterday, a company spokeswoman said a number of issues had affected BAT's volumes in the three months to March.
"The general economic environment with rising levels of unemployment, together with increases in excise, resulted in continued pressure on the premium segment... and in some markets... there was down-trading to illicit trade," the spokeswoman said.
Competitor Philip Morris International said recently that illicit trade in cigarettes harmed governments, consumers and manufacturers.
"Around 80 percent of the smuggled cigarettes bearing Philip Morris International brand names seized by law enforcement in 2009 were fakes," the firm said.
Philip Morris International said it was undertaking a broad series of measures, including tracking and labelling, in fighting the trade in illegal cigarettes to ensure its brands were protected.
Cadiz Asset Management equity analyst Mark Ansley said it appeared that the practice of illicit trade was growing and taking market share from tobacco firms around the world.
"It is imperative that tax collection authorities and tobacco companies collaborate to expose and prohibit this trade. Governments lose out on the tax revenues from the industry and the legal tobacco companies are impacted by crucial revenue loss," he said.
Ansley said it was estimated that illicit trade was as high as 39 percent in some countries. "The consumption of illicit cigarettes in key markets for BAT are estimated at 20 percent in South Africa, 30 percent in Brazil and 30 percent in Canada," he said.
Burrows said he was also concerned that the World Health Organisation's framework convention on tobacco control was considering forcing tobacco companies to sell cigarettes in plain packs.
"We fear this move may grow the amount and availability of illicit cigarettes as concealing cigarettes in shops will blur the distinction between legal and black market cigarettes."
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