Tax stamps on excisable goods: FBR needs to consider three vital points: experts

The Federal Board of Revenue needs to consider three fundamental questions during its deliberations on the proposal for affixing security labels or tax stamps on multiple excisable goods, including cigarettes. Experts raised three queries here on Wednesday on the issue of tax stamping.
One, why did the Government of Turkey decide not to renew the contract of the international company offering tax stamping in 2011? Secondly, whether the solution which was operational for 5 years reduced illicit trade of excisable goods? Thirdly, did the tax stamping on cigarettes increased government revenue in the said country?
The FBR is rightly being cautious in considering all options available and wants to exhaustively study the system as well as its international precedents before reaching any definitive conclusion. According to information available with this scribe, a paper-based tax stamp for tobacco products was introduced in Turkey in 2006. Similar solution was also introduced for spirited beverages. This technology was supplied by the same international company that is now approaching FBR to implement that very solution in Pakistan. Following a public tender in 2011, the Turkish government decided not to renew the contract of the same company.
As per official custom authorities data, before this technology solution of tax stamps were implemented in Turkey in 2006, illicit tobacco (smuggled, counterfeit and tax-evaded) accounted for around 6 percent of the market. By 2011, illicit trade had increased by more than 300 percent, to 20 percent. Thus the technology based solution of security labels or tax stamps failed to tackle illicit trade.
Experts said that the technology experience was not successful in Turkey due to multiple reasons, chief amongst which was the absence of a foolproof implementation mechanism. Pakistani tax authorities must carefully consider and review the Turkish evidence before taking any decision in order not to repeat the same mistake in Pakistan. Proponents of such technology based solution often claim phenomenal increase in Government revenues in Turkey as one solid reason for Pakistan tax authorities to follow suit. It is maintained that between 2007 & 2011, this tax stamp system in Turkey was responsible for increasing tax revenues from tobacco products by 31 percent.
Upon closer examination it transpires that multiple other factors are more likely to have positively influenced revenue collection over the same period. These extraneous factors include changes in tobacco excise duties, retail price increases by manufacturers resulting in more revenue generation and steady industry volumes from 2006-09. Hence, this technology had, at best, a questionable impact on tax revenues in Turkey.
The production of counterfeit excisable products was not properly checked despite implementation of tax stamping on cigarettes in Turkey. Print designs, holograms, colour shifting inks and other claimed 'secure' features of the paper stamps were quickly copied by criminal networks. The copies are sometime often so good that consumers and even enforcement authorities cannot easily determine whether the tax stamp - and thus the product itself - is genuine or not, they said.
The Turkish tax stamp, like paper-based markers used in other countries, has not reduced counterfeiting of genuine tobacco products. Counterfeit cigarettes have been found throughout Turkey, with counterfeit tax stamps applied to them. Similarly, has been the case with spirited beverages.
Another constant glitch that resulted in failure of the solution was that the covert serial codes printed on the stamps could not be read by the human eye. Expensive, proprietary reading devices, costing hundreds of dollars each, must be used to verify their authenticity. That meant only few law enforcement officials who possessed such expensive reading devices were in a position to properly distinguish between genuine and fake products. Consumers are completely left out of the process and given a false sense of security when buying products.
Experts objected that the system in Turkey did not always correctly read, activate or store serial codes. This meant that products were released into the market without the necessary stamp activation. As a result, genuine, tax-paid spirited beverages and tobacco products were found by enforcement authorities in shops as 'non-activated' on a number of occasions.
Enforcement authorities in Turkey also reported instances in the field where the covert serial codes printed on the stamps could not be read by the propriety scanners, creating uncertainty over the authenticity and tax-paid status of products for all concerned. A 2010 WHO FCTC report concluded that Turkey's paper tax stamp cannot meet the tracking and tracing requirements of the FCTC Protocol on Illicit Trade in Tobacco Products. A number of weaknesses of the stamp were identified that prevent it from being able to fully track and trace tobacco products.
While enforcement is the key to curtailing the menace of illicit trade, international tax stamp suppliers keep presenting their solutions to the Government as panacea for all illegal cigarette trade ills. The Government, however, needs to understand that the effectiveness of any technology is equally dependent on enforcement. If tax stamps did not work in Turkey, how can the tax authorities hope for a different outcome in Pakistan, where the incidence of illicit trade is higher and demographic and economic indicator much lower.