The local cigarette market is witnessing a steady growth in illicit trade in cigarettes costing Government millions of dollars, an official with the country’s biggest cigarette manufacturer BAT Zimbabwe has said.
BAT’s acting managing director Stephen Nyabadza told an analysts and media briefing early this week that the country is losing an estimated US$2 million annually from the sale of illicit cigarettes.
This, Nyabadza said, was noticed in the first six months of the year to June 2019.
“During the period under review, we have noticed a steady growth of duty not paid cigarettes, that is to say cigarettes priced below the minimum tax threshold in the market,” said Nyabadza.
He added that: “This illicit cigarette market is constraining the legal market,” as constrained consumers will naturally opt for such cheap products.
In the six months to June 2019, BAT reported a 20 percent slump in sales volume and management suggested that “duty not paid cigarettes”, were taking a sizeable market share.
This is also not the first time the ZSE listed entity has complained about illicit cigarette trades.
Former managing director Clara Mlambo last year told a similar meeting that the industry is grappling with products being sold at prices below the excise duty (implying tax evasion).
This, she said then, “continues to impact BAT’s volumes as consumers shift to these affordable options.”
“Once we reach those levels, it means that’s the revenue government will be losing because it means those products will not be paying taxes. It means we are taking away volumes from brands that pay excise duty to brands that are not paying anything.
Mlambo said the contribution of cigarette products from an excise perspective is significant to the fiscus and growing illicit trading will deprive government of valuable revenue.
In the half year to June 2019 BAT’s overall tax contribution decreased by 11 percent from $19,9 million contributed for the period ended 30 June 2018, to $17,8 million form the period ended 30 June 2019.
“The decrease in tax contribution was mainly driven by a decrease in volumes and once off withholding taxes paid in 2018, the cigarette manufacturing giant said.
“We believe the Government is losing an estimated US$2 million annually from the sale of illicit cigarettes,” said Nyabadza.
He suggested the illicit cigarettes were not only being smuggled into the country but were, in addition, probably coming from local manufacturers. Other than BAT, there are two main tobacco-product manufacturing companies operating in Zimbabwe, Savanna Tobacco and Gold Leaf. There are 6 other smaller ones also registered with the Zimbabwe Cigarette Manufacturers Employers Association
“We encourage full enforcement by the Zimbabwe Revenue Authority in factories and imports warehouses,” he suggested.
“In addition, we believe, simple technologies such as the machine counters will improve the integrity of the manufacturing environment and provide assurance to the revenue authorities that the right taxes are being declared.”
Another contributing factor to the sale of illegal cigarettes, according to BAT is the introduction of “ad valorem taxation on cigarettes in place of the specific excise system”.
Cigarettes pay an excise duty of US$25 per 1000 sticks.
BAT said the ad valorem system of taxation is not the preferred solution for taxation of the cigarette industry, “due to the fact this system leads to under declaration of taxes by unscrupulous manufacturers and importers.”
“We believe that this system will enlarge the already existing illicit market, making it difficult for legitimate companies to operate,” Nyabadza said.