Water bottle with a digital stamp
On August 21, 2023, Uganda’s revenue body, URA, issued a notice indicating a reduction in the cost of tax stamps for alcoholic beverages.
The notice was issued indicating that the fee for tax stamps for the product category of ‘other alcoholic beverages’ had been reduced from Shs 35 to Shs 17 regardless of whether the beverage was locally manufactured or imported into the country.
URA had initially introduced digital tax stamps to cover all excisable goods (goods to which excise duty is levied) as a result of slump in the revenue that was collected on locally manufactured products like cigarettes, soft drinks and beers.
The intention of the introduction of digital tax stamps in 2019/2020 was to ensure that URA obtains real-time, accurate and reliable information about the number of dutiable products that are manufactured and sold onto the local and foreign market.
Before this invention, manufacturers had been grossly under declaring the products on the market. It was not uncommon for a beer factory to sell 100,000 liters a day and only declare a paltry 100 liters of beer hence leading to a revenue loss on the unaccounted for liters.
Other reasons for its introduction was to enable easy tax administration and facilitate a forced compliance among taxpayers whilst ensuring that other government entities like UNBS, which is charged with ensuring quality assurance of all products on the Ugandan market, would easily track certification of goods.
Following the introduction of digitalized tax stamps, a manufacturer is required to affix a stamp on all products while still at the factory. This stamp is used by URA to tell the number of products on the market vis-à-vis those that have been consumed.
The introduction of these stamps, however commendable, came with a few challenges that URA has belaboured to resolve despite some being policy based and as a result, go beyond the mandate of URA that stops at implementing revenue collection.
The main challenge of using digitalized tax stamps is the fact that it increases production costs for manufacturers. These costs are often times trickled down to the final consumers. Where a dutiable product is, for example, ordinarily costing Shs 2,500, a manufacturer is forced to add Shs 50 to cater for the fees incurred in obtaining the tax stamps.
It is this challenge that parliament, in conjunction with URA, has tried to resolve by reducing the price of tax stamps on the category of ‘other alcoholic beverages’ as indicated in the August 21 notice.
URA is also faced with implementation challenges that have not been resolved. Uganda’s economy, being informal in nature, creates difficulties for URA to trace and know which of the products are on the market without digital stamps.
The best example is the ever-mushrooming business of aphrodisiac drinks. The number of the manufacturers of these drinks alone is almost double the number of URA employees in that even if URA were to deploy all its employees at factories to ensure that taxpayers affixed stamps on every product, a huge number of factories would be left uncovered!
To resolve such a debacle, the law that provided for digital stamps was enacted in such a way that it provided for a hefty penalty in case of non-compliance. The law mandates that a taxpayer who fails to affix and activate a tax stamp on a product is liable to pay a penal tax.
This penal tax is computed by comparing the equivalent amount of double the tax due from the product on the one hand and Shs 50m on the other. The higher of the two amounts is what a taxpayer is charged upon failure to comply with the duty to affix digital stamps on their dutiable products.
The penalty, in as far as it was intended to curtail the endemic under declaration of excise duty is, in my opinion, excessive. In itself, the penalty imposed means that where a dutiable product (for example, a bottle of mineral water of Shs 500) is found on the market without an affixed stamp, the manufacturer would be penalized to a tune of Shs 50 million!
Imposing a Shs 50 million penalty on a manufacturer whose Shs 500 mineral water bottle was found without a digital stamp, probably because of the negligence of their employee, would lead to unnecessary capital flight and subsequent closure of the business hence killing the beverages and other drinks industry.
Penalties are ordinarily imposed to ensure forced compliance by taxpayers and are created by the law. They must, however, be imposed reasonably in light of the economic realities in Uganda. This is not to say that taxpayers are justified in any way for not complying with the requirement of the law.
However, in order to encourage growth in the beverages industry and have a resultantly higher collection of excise duty, it is advisable that this penalty is set within the economic realities of the country. Taxpayers, on the other hand, are encouraged to comply in order to avoid such hefty penalties.
The writer is an Advocate of the High court and a tax expert
Source: The Observer
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