Islamabad - A proposal currently being studied by the FBR to introduce affixing of security labels or tax stamps on multiple excisable goods, including soft drinks, cigarettes, pharmaceuticals, tea has hit snags following doubts about its efficacy.

The proposal has essentially been brought forward by a Swiss company which is discussing with Pakistani tax authorities to introduce security marking, tax stamps and security ink/labels, etc on different goods, especially those subjected to excise duty.  According to officials, the proposal is further premised on the argument that introduction of security marking or tax stamps is of vital importance in combating illegal trade of all excisable commodities through a smart and secure technology having secure codes and traceable throughout the distribution chain.

However, even before the proposal can be implemented in Pakistan, doubts have emerged about its utility and efficacy.

According to a study conducted on tax stamps in Indiana USA in 2009, the idea of tax stamping on cigarettes is not feasible as it involves massive costs on installation of machines for affixing tax stamps on cigarette packs.

The study further concluded that encrypted stamps do not provide a significant impact in reducing contraband cigarette sales. Furthermore, whatever impact they may provide, which is highly unclear in itself, cannot justify spending taxpayer money on a solution that doesn’t deliver returns.  In fact, from 2005 onward illicit trade in Malaysia has steadily grown and today the country is ranked as world’s number one consumer of illegal cigarettes as percentage of total market, in spite of this Swiss technology implemented in Malaysia for the last nearly one decade.  According to experts, this system also does not work on a cross-border basis as any technology solution that has to work on cross-border basis requires similar technology solutions working in all other countries. All those systems need to be able to have an inter-face with each other and also be able to share and exchange data of goods, for example, cigarettes.

It may also be noted that Turkey also implemented this tax stamping solution earlier on but after watching its inability to produce the desired results, the Government of Turkey decided in 2011 not to renew the contract of the international company offering tax stamping. 

Experts are of the view that the technology experience was not successful in various countries due to multiple reasons, including the absence of a foolproof implementation mechanism being a leading on one. These experts believe that the Pakistani tax authorities must carefully consider and review the international evidence before taking any decision in order not to repeat the same mistake in Pakistan.

In the light of international experience and local ground realities, the way forward in Pakistan then should be stark clear for our local authorities. The only answer to illicit trade today is effective enforcement. While we would all like the country to be one day at stage where we can have millions to spare for experimental projects, unfortunately that is not the case today. We scour the national kitty for budgets, face mounting debts and fight to address issues like inflation, we simply do not have the luxury of spending on solutions that fail in different countries.