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For those observing the cigarette sector in the UAE in recent times, the recent announcement from the government that a new digital scheme for cigarette packs is to be introduced from 2019 should come as no real surprise.

In the wake of a 2017 GCC led doubling of the excise duty rate to 100%, there were calls for the government to be aware of the potential for increased sales of illicit whites to those consumers unable or unwilling to pay the significantly increased cost of a legally purchased pack of cigarettes. This is particularly the case given that illicit whites – usually imported from Iraq, Syria and Iran – already have a firm hold on the sector .

According to GlobalData (Cigarettes in UAE, 2018) contraband sales are reported to have amounted to 1.9 billion pieces in 2016, equivalent to an estimated 30.2% of the market. This level has remained fairly constant in recent years, despite government attempts to crack down on the trade.

The new digital stamp system represents the government’s latest – and potentially most effective – attempt at making sure cigarettes sold in the UAE generate the taxes due to the state.

A digital stamp system for cigarettes

In 2016 whilst the legal market for cigarettes stood at 4.4 billion pieces, overall consumption was placed at 6.3 billion pieces,  the missing 1.9 billion pieces representing a huge loss to government coffers. (Cigarettes in UAE, 2018)

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By GlobalData

Under the new scheme, all cigarettes packs legally sold in the country will feature a digital stamp containing tax-related data including manufacturer and importer details. These details can be read using special scanners, allowing customs officials and others to check individual products, ensuring the goods can be properly traced and accounted for.

The stamps are to be placed onto excise goods (after packaging) at the facility where they are produced (if manufactured in the UAE), or at a location outside the country before importing them, in a position determined by the UAE’s Federal Tax Authority (FTA), and at a rate set by the body. The stamps can only be obtained by an approved supplier.

Although exact details of the repercussions for failure to abide by the new rules have not been announced, the FTA has warned cigarette manufacturers that anyone caught operating illegally would be prevented from “exercising any commercial activity until they comply fully”.

The FTA announced that “The UAE is the first country in the region to implement a Digital Tax Stamp Scheme for tobacco products — the most advanced of its kind in the world”  and in doing so it is following in the footsteps of other countries with a high rate of illicit whites who have decided to abandon the easy-to-counterfeit paper tax stamps and move into the digital age.

Benefits of digital stamp systems

The benefits seem obvious. In East Africa, the Kenya Revenue Authority (KRA) introduced a new generation of tax stamps featuring a secure, serialised QR code and a corresponding string of letters and numbers (alphanumeric) that are visible to the human eye. In addition, the system utilised a smartphone app that scans the code for verification purposes, which has reportedly increased compliance and made the authentication and traceability of goods significantly easier.

In actual terms, according to the KRA, excise revenue grew by more than 28% in the 2015/16 year following adoption of the secure QR code tax stamps signalling the highest growth ever recorded in the country’s history of excise collection – strong evidence of the enhanced stamp programme’s success. The authorities in the UAE are hopeful that similar results will be observable here, with the resultant fillip to the nation’s financial resources.