Kenya: Digital Excise Stamp Debut Blow to Counterfeits and Tax Evasion

18 November 2019

Kenya Revenue Authority's move to digitally tax bottled water, juices, energy drinks and soda will deal a blow to not only counterfeiters but also tax evaders.

The KRA ordered manufacturers and importers to affix the highly secure Excisable Goods Management System (EGMS) stamps on the products from November 13.

Predictably, its bid to bring more manufacturers into the tax net and safeguard public health from contaminated drinks has elicited reactions from industry.

To avoid falling afoul of the sub judice rule, since the matter is in court, I will only comment on the general aspects of the practice and not the merits and demerits of the case.

East Africa has borne the brunt of cross-border illicit trade -- including counterfeits, smuggling and bootlegging.

Uganda, Kenya and Tanzania lose a combined $3.2 billion in annual revenues to illicit trade.

DIGITAL PATHWAY

Efforts to counter this, both as individual countries and under the East African Community banner, through legal frameworks and moves such as burning contraband and smuggled goods, have failed to deliver the desired results.

Recently, however, two of the EAC member states opted for technological solutions as a decisive way to tackle the vices.

Tanzania and Uganda have rolled out traceability systems -- the Electronic Tax Stamp (ETS) system and the Digital Tracking Solution (DTS), respectively.

When Tanzania launched the first phase of the ETS for tobacco, wines, spirits, beer and other alcoholic beverages on January 15, the results were instant.

Excise tax collection shot up by 22.7 per cent on locally produced spirits during the first quarter.

Excise duty on the goods produced under the ETS rose 16 per cent from Sh24 billion in January to Sh28 billion in April.

The second phase, to include soda and carbonated drinks, launched on August 1, boosted excise tax and VAT for this category by 18 per cent in the first two months, compared to the same period last year.

PLAYING CATCH-UP

Despite a well-coordinated campaign against DTS, Uganda went live on November 1 and is progressively implementing the system in factories.

Just a week later, a number of tobacco, soda and water sites had gone live.

The story is a bit longer and more complicated in Kenya, however, despite it boasting of being the "hotbed of innovation" owing to its penchant to develop and adopt digital solutions to the challenges it faces.

Kenya was the first in the region to adopt digital tax stamps. The EGMS was initially launched in October 2013 to cover tobacco, wines and spirits, and later beer in early 2016.

But when it came to non-alcoholic beverages and cosmetics, the industry uncharacteristically dragged its feet.

For decades, the local industry has suffered the most from illicit trade and fakes and has been calling upon the government and regional bodies such as Comesa to act. Surprisingly, it is at the forefront of resisting EGMS.

As Kenya now plays catch-up with Tanzania and Uganda, it can take a leaf from the journey of its neighbours.

PRODUCT QUALITY

One, it is clear that, after many years of false starts, technology in the form of track-and-trace systems is one of the key tools in battling tax evasion and illicit trade.

Secondly, the solution has delivered value for all stakeholders. For instance, the legitimate manufacturers and popular brands are the most affected by fakes, which make them less competitive and eat into their profits.

The tax stamps will improve product quality, hence benefiting the consumer and promoting public health protection, which will, in turn, grow the manufacturing sector by enhancing its competitiveness.

Thirdly, the Tanzania and Uganda cases demonstrate that with unwavering government support, it is possible to curb tax evasion and counterfeiting.

Torching contraband and counterfeits has its limitations. Authentication and traceability solutions such as ETS, DTS and EGMS can facilitate a significant reduction of such goods in the market in the first place as well as the tracking and verification of the production and importation volumes.

The region should employ such proven methods to wipe out illicit trade and tax evasion and level the taxation field.

Ms Gatwiri is a Fourth Year journalism student at Moi University. [email protected]

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