Setting the record straight: Tax stamps work

The authors say that the tracking of tobacco products is vital
The authors say that the tracking of tobacco products is vital
Image: Katarzyna Białasiewicz/ 123RF Stock Photo

We read with some amusement the article “SARS’s track plan might not work,” that appeared in the Sowetan on 10 September 2019.

The article is disconcerting on many levels. SARS is indeed poised to implement a track and trace system for tobacco products. That much is true. Such systems are endorsed by the World Health Organisation, law enforcement agencies and pretty much anyone who knows anything about tackling the illicit trade problem. So, when a publication simply publishes sound bites from a party that is inherently biased (like BAT), the record must be set straight.

The article does remind us that it is a heartening indicator that SARS is indeed on the right track, and SARS should continue along the road that lets it better secure the tobacco supply chain.

Ultimately, illicit trade flourishes for one simple reason: because the tobacco supply chain is almost entirely opaque, making it virtually impossible to figure out where packs come from, where they are supposed to be, and whether tax has been paid on them. So, when someone buys a pack of cigarettes irrespective if it came from a national chain or a corner tuck shop, there is no way of knowing if the product is licit or illicit. The traceability solution that SARS is seeking to introduce is one of a range of measures that work together to fix this.

There are a number of fundamental issues with the article:

First, research shows that as much as 98% of illicit cigarettes come from licensed, known tobacco manufacturers. Second, research also shows that as much as one third of all export consignments of cigarettes go missing somewhere along the supply chain. When one considers that BAT South Africa, on its own account, ships its packs to at least 22 other countries the fact that we have no way of knowing that those packs actually left or where they went, should give us all pause. SARS is planning to implement a track and trace system for tobacco products - albeit with some delays – and as it is obliged to do under the Framework Convention on Tobacco Control – which South Africa has signed – that requires track and trace systems to be implemented.

The current paradigm used by SARS to “prove” that taxes have been paid, known as the “diamond stamp” is nothing short of useless. There is no control of the supply of physical die stamps (that simply make a dent in the shape of a diamond on the bottom of the pack) and they tell you nothing about the origin of the packs, where they are supposed to be or if the taxes has been paid. This needs to change if SARS is to have any chance of fighting the growing scourge of illicit tobacco on the market.

The benefits of such programs are both obvious and well documented. The article cites a BAT company statement about the Kenyan system and states “the system that SARS wants to introduce has not worked in Kenya and may therefore also not work in South Africa”. This is patently false and contradictory to what the Kenyan Revenue Authority (KRA) officially reports on their highly successful system. Portraying Kenya’s use of secure marks as a failure is nothing short of disingenuous. The truth is that Kenya is widely held up as a case study of the very positive impact the introduction of a tax stamp can have. Through their program the Kenyan Revenue Authority managed to seize more than 350,000 illicit packs; secured a 100 percent prosecutorial success rate in more than 400 criminal cases; and increased their excise revenue collections by 53% .

In fact, according to an official with the Kenya Revenue Authority who saw the article, the tax stamp program there resulted in a reduction in the illicit trade in cigarettes, from 15 percent, to less than 5 percent, and indeed actually benefited BAT, as it resulted in the closure of all of the other local manufacturers – BAT is now the only licensed manufacturer left in Kenya.

Tax stamps and secure marks work: More than 140 billion tax stamps used by more than 150 national and local governments around the world. Other country case studies show clear successes: In California the tax stamp system resulted in a 37 percent drop in tax evasion within two years of implementation, and an additional $870million in excise tax revenues. Some countries have noted a 61 percent reduction in smuggling and 38 percent less tobacco-related fraud; they’ve seen their tax revenues increase by as much 50 percent and the illicit trade prevalence drop by a significant 6 percent.

In the article, BAT is quoted as raising other spurious claims about highly secure modern tax stamps.

Suggesting that “the system will make it difficult for manufacturers to export to other countries” displays a distinct lack of understanding of how the solutions are implemented– cigarette packs are marked differently depending on whether they are intended for the local market, or for export. The use of secure marks has not presented in this respect a problem in any of the other 150 countries and states where tax stamps have successfully been implemented, and it is patently simply an alarmist statement intended to scare SARS off. The statement in the article that “ten thousands farmers will be immediately wiped out, putting another 35,000 dependents at risk" is equally simply alarmist rhetoric. The simple fact is that BAT only employs around 2,187 people in the country. The rest of the number includes what BAT itself elsewhere has called “indirect and induced” numbers which essentially includes the cashier at the fuel station who rings up your pack of cigarettes – making their numbers a bit of a stretch.The truth is that what BAT is doing is laying the groundwork for an argument that SARS should use a traceability system that the tobacco industry itself developed (the “digital market printed on a pack at the machine,” that is referenced in the article)

The problems facing the industry-developed and punted solution are substantial: BAT is unlikely to tell you that this very same traceability solution was initially developed by the tobacco industry to fulfil an obligation under an EU court order where they were fined a few hundred million euros, for the smuggling of their own packs . The solution was developed by the industry, for the industry. It was never meant to be an anti-illicit device for government. And the digital codes – which is only a simple a alphanumeric number – are incredibly susceptible to fraud themselves, because a legitimate code can simply be “cloned” or copied, and used multiple times without anybody being any the wiser. Why would any government choose a solution that lets the foxes guard the henhouse?

The BAT statement, and the article that followed, is aimed very simply at getting SARS to adopt a solution that favours the very industry that is being told to toe the line. BAT has been extremely vocal about how SARS should be clamping down on illicit trade. Introducing a secure mark that makes it possible to see where packs came from, and to validate that they are where they are supposed to be, is the very best way to do so. Any company that legitimately wanted to fight against illicit trade would welcome the initiative. The fact that BAT does not do so may suggest that the company itself would prefer the tobacco supply chain to remain opaque.

SARS would do well to learn from the Kenyan story, and ignore industry rhetoric designed to preserve the status quo.

About the authors: Telita Snyckers and Michael Eads are international tax and customs transformation consultants. Key clients include the International Monetary Fund, the World Bank, the European Commission and the Framework Convention Alliance, after both having previously served as executives at SARS. Savera Kalideen is the Executive Director of the National Council Against Smoking

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