Viewpoint: Tax stamps – on the authentication front line

Excise duty on cigarettes and alcohol is an important source of government revenue and a means of controlling consumption. The illicit trade of these and other products, through tax evasion, smuggling and counterfeiting, costs treasuries billions of dollars a year in lost revenue. And the cost is not just a financial one. The damage caused by counterfeiting to a company’s brand reputation, loss of sales and market capitalisation is almost incalculable.

So, the use of tax stamps not only ensures that tax payment records can be kept but also provides assurance that the products they are affixed to are genuine. Research suggests that tax stamps currently make up a significant share of the security print market with billions issued annually for cigarettes and alcohol alone, making them part of the largest sub-sector of the security print market and ahead of banknotes in terms of the volume of printed documents.

The technology has evolved into an accepted and effective authentication device, regularly specified in government tenders and commercial bidding opportunities. Today, there is no better opportunity for authorities to act decisively to boost excise revenue from growing tobacco and alcohol sales than by continuing to use tax stamps as an integral part of their frontline protection and security strategies.

More than 140 billion tobacco and alcohol stamps, in the form of securely affixed labels, are issued every year by over 150 provincial and national revenue agencies around the world, indicating that governments and agencies see the value of using them as central features in effective revenue gathering strategies.

Modern tax stamps are also finding increasing usage as effective frontline security devices in track and trace strategies to combat different forms of illicit trade. In this role, they can be integrated with enforcement programmes and supply chains to tackle smuggling channels and once implemented on tobacco and alcohol, potentially extended to a range of other products exposed to similar risks.

They can also feature in initiatives aimed at tackling ‘returning exports’ or ‘round tripping’, where products are manufactured and exported to avoid domestic tax before then being smuggled back into the country of origin to avoid excise taxes.

Indeed, the role of tax stamps has been further recognised by the United Nations in a report that acknowledged their evolution to meet new product protection and security needs as well as the paramount role they play in securing excise revenues for national authorities and protection agencies. The report signalled that ‘governments are cooperating with suppliers of anti-counterfeiting technologies, who are providing them with increasingly sophisticated tax stamp systems’ – a recognition of the trend towards utilising tax stamps as instruments for product track and trace rather than as simply tools for tax collection only.

Early 2018 will also see the introduction of a new international tax stamp standard in a move broadly welcomed by many in the sector and supported by ITSA. The standard comes against a global backdrop in which some countries or regional states have stamp programmes for collecting tax, while other parts of the world have no programmes. This is driving the requirement towards ISO 22382 for the specification of tax stamps – a unifying initiative that will bring all countries using stamps, and encourage those not using them, to have programmes that are in line with the best and most effective on the market.

Demonstrable benefits

The growing role tax stamps are playing in interoperable traceability and authentication applications is reinforced by several successful tax stamp programmes, which demonstrate how the technology can provide an ideal all round solution.

In east Africa, the Kenya Revenue Authority (KRA) has introduced a new generation of tax stamps featuring a secure, serialised QR code and a corresponding string of letters and numbers (alphanumeric) that are visible to the human eye. This move, along with a smartphone app that scans the code for verification purposes, is enhancing compliance and easing the authentication and traceability of goods throughout the supply chain. It builds upon the existing features of the current tax stamps, along with a production monitoring and traceability system.

According to the KRA, excise revenue grew by more than 28 per cent in the 2015/16 year to almost KES 49bn ($485m) following adoption of the secure QR code tax stamps. The same period also saw domestic excise revenue grow by 43 per cent, contributing an additional KES 8bn ($79m) to the country’s exchequer and signalling the highest growth ever recorded in the country’s history of excise collection – strong evidence of the enhanced stamp programme’s success.

The KRA is an example of how innovative tax stamp programmes can secure revenues in parts of the world that are at risk from smugglers, brand pirates and the general trade of illicit goods. Since its introduction, the Authority says that product manufacturers who have embraced the programme, have seen strong sales growth compared to non-stamped products. Moreover, since implementation between 2013 and the present day, excise revenue has increased by 82 per cent, enabling more than KES 200bn ($2bn) to be recovered from KRA projects.

Across the Atlantic, an initiative started in 2015 by the US state of Michigan’s Department of Treasury showcases the benefits of combining digital and material-based security with track and trace functionality and automated reporting systems for tobacco tax stamp programmes.

While cigarette consumption has been in long-term decline in Michigan, the tax stamp programme has led to a significant rise in cigarette excise tax collections, which will continue to run parallel to the overall market demand for cigarettes. More specifically, revenues were up by $21.4m (2.43 per cent) in the first 12 months following the introduction of the programme, and by $35.5m (4.03 per cent) versus forecasted revenues under the previous thermal stamping programme.

Return on investment has been a key achievement. The total revenue increase since implementation stands at over $72m, with the cost of the entire scheme returned within one year – the programme is now fully self-funded through these additional revenues.

New developments

Developments to use tax stamps for other applications beyond their original use are also underway. For example, a fiscal stamp issued by the National Seeds Institute of Argentina (INASE), a government organisation responsible for certifying the quality and identity of seeds sold to Argentine farmers, aims to promote safety throughout the Argentine seed industry by protecting farmers from fake seeds and facilitating traceability.

Oil products too are starting to see the adoption of tax stamp technology to help protect and secure excise duties. Some solution providers now have the capability to mark oil products at a molecular level – these markers work as an ‘in-product tax stamp’ that cannot be altered or copied. On the detection side, this technology is reported to be highly accurate and capable of exploiting advanced spectrometry techniques.

The development provides governments – which currently include those in Tanzania, Ghana, Uganda, Albania and Kenya, among others – with a sophisticated tool to tackle fraud in the oil sector, focusing on downstream products but with the ability to mark crude in the midstream process. The technology is capable not only of providing court-admissible evidence of fraud, once detected, but of assisting authorities in identifying specific points in the supply chain where adulteration might have taken place.

In the wider drinks sector, governments should tax sugary drinks to combat global obesity and diabetes epidemics, says the World Health Organisation (WHO), which claims that a 20 per cent price increase could reduce consumption of sweet drinks by the same proportion. To do this, tobacco tax stamps can be adapted to monitor such products during the manufacturing stage and throughout the supply chain to stop the chances of them ending up in the illicit market. Adopting the form of an on-line marking scheme combined with a production counting capability, this type of system could also be extended into a comprehensive track and trace platform.

Pakistan, Kenya, Morocco, Brazil and Armenia, among other countries that already impose excise tax on sugary drinks, have implemented, or are in the process of implementing, systems like this – systems that originated in tobacco and alcohol tax stamp programmes but that are now being extended across other product sectors.

So far as the future is concerned, the outcome of ongoing proceedings to implement the EU Tobacco Products Directive (TPD), and its subsequent influence on the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products, will likely have an impact on tobacco tax stamps. But if the technology continues to provide effective solutions for tax collection, product authentication and secure track and trace, then there’s no reason why tax stamps should not continue to succeed.

About ITSA

ITSA was founded by several leading industry companies and stakeholders to ensure the better understanding of the benefits of tax stamp programmes and to promote the highest professional standards within the sector. To this end, one of its key objectives is to support and promote the introduction of the ISO 22382 standard for tax stamps.