Digital tax stamps increase burden on the manufacturing sector – report

The high costs of digital tax stamps (DTS) have increased the burden on manufacturers, with some companies closing business, the just-released DTS impact study report indicates.

Established in November 2019 as a tax administration tool in the excise duty system, DTS is aimed at, among other things, combating trade in counterfeit products and illicit trade, enhancing fair competition in the market and providing real statistical data for both tax policy and administration.

The adoption of DTS stemmed from concerns that local manufacturers and importers were under-reporting production figures as well as the resultant excise duty. DTS has been used as a tool for safeguarding government revenues and curbing illicit trade in Uganda. In 2022, the list of gazetted products was expanded to include various locally manufactured goods and imported goods such as cement, cooking oil, alcoholic spirits, cigarettes and soda, among others, with the aim of maximising excise duty collection.

Following the enactment of regulations mandating all manufacturers of gazetted products to implement a DTS management system, the contract for this initiative was awarded to a Swiss-based company, SICPA Uganda Limited, which was tasked by the Uganda Revenue Authority (URA) and Uganda National Bureau of Standards (UNBS) to oversee the installation and enrolment of all manufacturers, producers, and importers onto the system.

According to the report, Uganda experienced increased excise duty collections of Shs 2.13 trillion from July 2016 to June 2019. The system, however, increased the cost of operations and business closures due to DTS-related expenses, affecting the growth and expansion of businesses.

“The implementation of DTS led to a significant increase in the cost of operations for most manufacturers. These costs include the procurement of hardware, software, and infrastructure required for DTS compliance. These upfront investments have posed significant financial challenges for manufacturers, particularly small and medium Enterprises (SMEs) with limited capital resources,” reads part of the report.

Stephen Asiimwe, the executive director of the Private Sector Foundation, said most of the costs incurred are absorbed by the manufacturers, and not passed on to the final consumers, for fear of the impact on consumer demand.

Companies that have ceased operations due to high DTS costs, according to the Uganda Alcohol Industry Association (UAIA), include Global Distillers Limited, Four-Star Beverages Limited, Parambot Distillers Limited, Gama Distillers, Kasese Distillers and London Distillers Limited, among others.

DTS costs vary across different products. For instance, DTS for wines and spirits is Shs 110 while Shs 13 and Shs 17 are charged for bottled mineral water and any other non-alcoholic drinks, respectively.

“Uganda’s stamp prices, on average, are more expensive than those in the East African region by 38 per cent yet all three countries share the same supplier, SICPA. Uganda also has more products gazetted for excise duty when compared to its neighbouring countries; several businesses have closed, impacting some manufacturers’ capacity to create more jobs, invest in additional infrastructure, and increase their production capacity,” Asiimwe said.

The report indicates that in Kenya, DTS prices are on average 28.7 per cent lower than Uganda’s, Rwanda’s (4.5 per cent), Zambia’s (89.2 per cent), and Tanzania’s DTS costs are 25.9 per cent lower than Uganda’s.

Andrew Kilonzo, the managing director of Uganda Breweries Limited, called for a review of the implementation framework of DTS to achieve the best system at the least cost possible; as well as a mechanism established for manufacturers and importers to recover incurred expenses.

“For UBL particularly, the cost of installation has been significant as both a machine and manpower are used to print and affix the digital tax stamps on the different ranges of products. The government must ensure that the implementation of digital tax stamps does not disproportionately burden small-scale producers or consumers.”

He noted that UBL, for example, has since spent Shs 451 million to install stamp applicator machines, in addition to over Shs 77 billion spent to date on buying stamps.

“This shows that at current rates, we are spending an average of Shs 20 billion annually on stamps alone and another Shs 84 million on incidentals. DTS is a significant revenue collection tool for the government, thus negatively impacting shareholder value.”

John Musinguzi, the commissioner general of the Uganda Revenue Authority (URA), pledges to spearhead the review of the costs of digital stamps. He noted that since the introduction of the DTS, they have observed an improvement in revenue collection since the level of compliance is high.

“The cost of implementing DTS is designed to be manageable and is outweighed by the benefits of improved tax compliance and the reduction of illicit trade. Our primary challenge is not the system’s expense but ensuring that all businesses comply with these necessary regulations,” he said.