Illegal alcohol trade: Govt loses Shs17b

In the tobacco sector, estimates indicate Shs30b are lost annually to illicit trade, which therefore tells of a well-spread cancer that continues to be a challenge to specifically consumers, the Uganda Revenue Authority (URA), and the government as a whole. 

The vice transcends borders with a well-oiled network through which goods are moved and sold to unsuspecting consumers. 

In other words, it is a real challenge that needs multi-faceted long-term solutions, devoid of quick fixes.       

Of course, the world is now a large concentration of technological innovations, and the advent of digital solutions offers some hope.  

For instance, the EU uses the track-and-trace digital solution, which primarily allows transit traders operating within a certain jurisdiction to establish an integrated system that tracks the movement of goods across shared borders.

The system uses unique identifiers that make it easy to monitor and track the movement of goods in real-time across borders and along the supply chain. 

It monitors instances of possible tampering along the supply chain and captures storage data. 

It is this solution that the East African Business Council (EABC) is modeling to use to control a vice that has been growing annually. 

However, for it to work in Uganda, the country needs to establish an own track-and-trace system, just like other countries, which will be merged with other to form a single system. 

Already, there are discussions, regarding costs involved and if regional governments can work with the East Africa Business Council to implement the system under a public-private partnership arrangement.  In June last year, Dr Elly Karuhanga, the BATU chairman, told shareholders that illicit trade continues to hurt the company’s cash flows, reducing its revenues by Shs3.7b from Shs48.9b in 2022.

“Worryingly, trends show that illicit tobacco trade is on the rise, despite the efforts to curb it,” he said. 

Actually, in 2022, a third-party industry report indicated that the percentage of illegal cigarettes traded in Uganda had increased to 29.4 percent from 23.8 percent in 2021.

Therefore, Dr Karuhanga said, there should be a multi-agency approach to effectively fight the scourge and its associated threats. 

Research by Acode indicates an estimated 19 percent of cigarettes sold in Uganda are contraband, with the main source being Kenya. 

Illicit trade remains a challenge across East Africa, and in May trade representatives from within EAC in Dar es Salaam discussed measures for developing a framework to find a solution. 

Thus, the track-and-trace solution used by the EU, and now being proposed by the East African Business Council offers a solution.  However, one challenge remains. How does the region integrate customs procedures, and administrative, and legal mechanisms to streamline cross-border trade?

The region is still grappling with disputes between partner states over product origin. But beyond this, it will be a challenge for small businesses to fully transition to digital in the face of dampened sales and low turnover.

However, Mr Hafiz Choudhury, the US-based M Group International tax consultant, says close coordination is necessary to run an effective track-and-trace system “within and between governments.” 

“Based on the firm trade collaboration systems that already exist within the EAC, it shouldn’t be difficult to … apply a track-and-trace system,” he says.

The East African Business Council is planning to meet members of the EAC secretariat to work on an action plan to advance the idea of an integrated track-and-trace system.

Complexities of the EU system

Research firm Framework Convention Alliance has found that the system has a major built-in flaw that permits tobacco manufacturers and importers to select their own data storage providers and auditors. 

This means that tobacco companies have some control over who monitors and stores their compliance data.

This, it says contravenes sections of the Illicit Trade Protocol, which assigns the responsibility to government or regulatory authorities but not the industry itself.

Additionally, the system lacks adequate oversight by independent third parties during the application of unique identifiers at the time of manufacturing, thus, there is not enough external supervision to verify that the identifiers are properly applied and recorded.

“Tobacco producers could exploit this weakness by cloning or not affixing a unique identifier to some of the cigarette packets they produce,” Framework Convention Alliance says in a policy note, adding that the EU requires more elements to be included in the unique identifiers on tobacco products.  

The Illicit Trade Protocol requires data on the date and place of manufacturing, manufacturing facility, product description, and, if available, the intended market of retail.

URA deploys digital tax stamps to fight illicit products

Illicit trade eats into taxable revenue and it is partly for this that URA implemented the digital tax stamps in 2019. 

Speaking at the launch of a report on the impact of digital tax stamps, commissioned by Private Sector Foundation Uganda, URA Commissioner General John Musinguzi Rujooki, said digital tracking solutions were instrumental in eliminating illicit products and creating fair competition.  

Therefore, he said it was important that manufacturers look beyond the challenges of the solution to focus on their importance in cleaning the market of illicit products and ensuring fair trade.  

“There are areas we need to study carefully, for instance, the manufacturers of Kombuchas were not paying any tax, but they were taking up the market where those who pay are supplying their products. They, therefore, had to comply with this new experience or close. 

That is good in achieving the intended objective to clean the market for tax-paid products and increase sales of those who pay tax,” he said.

Ms Agnes Ssali, the Uganda Breweries legal director and company secretary, had during the launch of the report indicated that illicit trade remained a sore throat, costing manufacturers billions of shilling. 

“We have 65 percent of illicit trade in the alcohol sector,” she said.

A report by Euromonitor last year indicated that only 35.5 percent of alcohol, which translates to 543,331 litres, was legal, while 64.5 percent or 978,905 litres were illicit, more than half of the 1.53 million consumed in the period between 2017 and 2020. 

Mr Rujooki also indicated there were provisions for a progressive reduction in the price that will be achieved as the country achieves some targeted milestones. 

“Every policy bears first and foremost the interest of the manufacturer. We shall … work together for the common interest.  The contract we have with the provider (SICPA) has details on how the cost will be reduced as we improve compliance and hit the threshold. Every time we hit the milestone, we are in a position to negotiate,” he said, noting that they had already registered price reductions for spirits, beers, and Kombucha stamps.  

Digital tax stamps were implemented in 2019, with URA conducting several sensitization workshops for Ugandans to appreciate the importance of the stamps. 

However, reports indicate compliance remains a significant hurdle. 

Reports from institutions such as the International Monetary Fund have highlighted the benefits of digital tax stamps in Uganda since 2019 and in other countries with similar systems like Kenya and Tanzania.  

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