Digital tax stamps: A waste of tax payer’s money?

Studies show new initiative will merely benefit the contracted firm

Kampala, Uganda | PATRICIA AKANKWATSA | On April 12, the Uganda Revenue Authority announced that it had rolled out digital stamps to combat illicit trade and seal revenue leakages. This move follows Kenya and Tanzania that have already done so.

Clare Musiime Bakanga, the change leader digital tracking solutions at URA said the taxman plans to start with cigarettes in May and thereafter spirits, beers and wines in July. She said soda and water are set to be included into the initiative in August and September this year, respectively.

“URA is working with the Uganda National Bureau of Standards (UNBS), to ensure they minimize revenue leakages, combat illicit trade and money laundering and be able to trace the whereabouts of the product,” she said.

URA has already contracted a Swiss Company, SICPA, to install and run the Digital Tax Stamps system at a cost yet to be disclosed.

Digital tax stamps are tamper-proof physical paper stamps with security features and codes that are applied to goods or their packaging to prevent counterfeiting. The stamps enable traders and manufacturers track the product’s movement and government to monitor compliance of the product and stamp.

But the current situation both at the UNBS and URA shows that the initiative is already dead from its inception, and instead government is likely to incur costs with minimum or no returns.

First, the initiative is targeting formal manufacturers who already have clear and audited production and distribution processes for tax purposes, signaling the digital tax stamp company will add limited value into the tax collection measures.

Secondly, UNBS has a limited number of staff for not only covering the entire country but also for doing many things. Currently, UNBS covers only 17 entry points out of about 165 borders, leaving most of the borders with no manpower and an avenue for smugglers.

This is further compounded by the fact that UNBS staff serve as public officers with their appointment letters stating that they need to work for 40 hours a week yet people in the private sector potentially work 24 hours a day for the entire week. To make the situation even worse, UNBS is charged with the responsibility to fight counterfeits that has already overwhelmed the institution given its limited human resource capacity and expertise.

In the region, Kenya and Tanzania implemented digital stamps in 2016 and 2018, respectively, for various products including wines, spirits, tobacco, and beer to seal tax leakages.

However, data from Kenya Revenue Authority for July-December 2017 showed that tax collected from sale of beer, cigarettes and spirits – the main revenue streams – declined by 16.3%, 16% and 11.2%, respectively, compared to 2016, amidst, the availability of digital stamps.

A study carried out in New York City in 2015 by public health researchers found that licensed tobacco retailers throughout the city were selling a substantial number of cigarette packs carrying either counterfeit or out-of-state tax stamps.

Illegal cigarette sales were more pervasive in independent stores, as opposed to chain stores, according to the study published in the BMJ journal Tobacco Control.

“Our research found that illegal cigarettes are regularly available over the counter in New York City,” said study author Diana Silver, associate professor of public health at NYU’s Steinhardt School of Culture, Education, and Human Development and College of Global Public Health.

“Taxes on packs sold with counterfeit or out-of-state tax stamps are not being recouped by the city and the state.”

John Njiraini, the Commissioner General at the KRA told his guests during the 2018 Tax Stamp Forum in Nairobi that while tax stamp technology is now well developed, its effectiveness especially in combating tax evasion, depends to a large measure on the extent to which, such technology is infused into other tax compliance processes.

“There is need therefore to look at tax stamp systems not in isolation but as part of the holistic process of addressing tax compliance, and hence as part of the wider technology infrastructure built to support tax compliance,” he wrote for the Standard newspaper, a Kenyan-based daily.

He said the present practice where tax stamp systems are developed as stand-alone platforms, may not in the long run effectively deliver the kind of holistic solutions required for tax administration. After all, he said, detecting evasion of excise taxes without having commensurate interventions to address other tax streams equally affected is not only narrow minded but also possibly as well self-defeating.

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