The Global Use of Tax Stamps – Asia and Australasia

In the January issue of Tax Stamp & Traceability News™, we launched a new series on the use of tax stamps and associated track and trace systems in different regions of the world, starting with Africa. This month, we shift the focus to Asia and Australasia.

Although not all countries in Asia use tax stamps, the region accounts for over 55% of all spirits stamps in existence (based on 75cl bottles) and over 30% of cigarette stamps (based on packs of 20 cigarettes).

Consumption levels in the Asian region – and with them, tax stamp use – are forecast to grow in each sector between 2018- 2023, by 1% for cigarettes, 15% for spirits and 50% for wine.

Some of the largest individual country consumers of tobacco and alcohol reside in this region, namely Bangladesh, China, Japan, India, Indonesia and Vietnam. Together they account for almost 60% of global tobacco consumption (China alone accounts for 45%, although it doesn’t currently use tax stamps).

In the case of spirits, the same six countries, plus South Korea, account for more than 60% of global consumption, with China alone consuming over 40%. As far as wine is concerned, China, Japan, Australia and India account for over 15% of global consumption.

In 2010, 12 countries were using tax stamps – 11 for both tobacco and alcohol, and one, India, for alcohol only. By 2019, this figure had increased to 13 countries, with Sri Lanka’s adoption of alcohol stamps.

In volume terms, tax stamp usage in Asia for cigarettes was 30.2 billion in 2010, 32.5 billion in 2018, and is projected to grow slightly to 32.6 billion by 2023, based on tax stamp programmes currently in operation. The corresponding figures for spirits stamps are 4.9 billion, 5.9 billion and 7 billion (based on 75cl bottles).

Although the sheer size of the region – and the fact that most of its countries don’t currently use tax stamps – offers significant business potential for tax stamp suppliers, there has only been one new adopter of tax stamp programmes in the last decade (ie. Sri Lanka).

However, those countries in the region that are party to the WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (ie. Fiji, India, Mongolia, Pakistan, Samoa and Sri Lanka), will be obliged to implement a secure track and trace system on tobacco products by 2023, which may also include the introduction of tax stamps (indeed, Mongolia is the only country in this list to already be using tobacco stamps).

Let’s now take a look at some of the countries in Asia in more detail.

Bangladesh has been using tax stamps on cigarettes since 2002, provided by the Security Printing Corporation of Bangladesh. They were introduced at a time when the illegal trade of cigarettes represented 20% of the total market. The stamps were instrumental in reducing illicit trade to 1.2% by 2004 – a level which, according to Bangladesh’s National Board of Revenue (NBR), has remained relatively constant.

However, no illicit trade data exists on bidis (which are a type of cheap cigarette made of unprocessed tobacco wrapped in leaves), which is likely to be substantially higher than for cigarettes because bidi manufacturing operations largely consist of home-based, small-scale setups that fall outside of the tax net.

Currently, about 11% of revenue collected by the NBR comes from the tobacco sector, which is a significant amount compared to the single-digit percentages of many other countries.

According to the 2018 World Bank report ‘Confronting Illicit Tobacco Trade: A Global Review of Country Experiences,’ the fact that cigarettes provide such a large source of government revenue serves to explain why illicit trade levels of cigarettes are so low: because the NBR is particularly vigilant in protecting this revenue source.

Protection measures mentioned in the report include strong cooperation with cigarette manufacturers, effective use of tax stamps, and a strong legal foundation that provides for stiff penalties and enforcement mechanisms such as surveillance, raids and seizures, mobile courts, check points at land, air and seaports and surveillance of courier services and mobile phones.

In 2016, Bangladesh’s tax stamp programme was upgraded to include five types of stamps and banderoles for cigarettes and bidis, as well as stamps for soap products.

Moving to China (which doesn’t use tax stamps), the tobacco industry in this country is essentially composed of one, powerful, state-owned enterprise. The commercial arm of the enterprise, the China National Tobacco Corporation (CNTC), is managed by the government arm, the State Tobacco Monopoly Administration.

CNTC is the largest tobacco company in the world, producing 40% of the global cigarette supply. The company has a monopoly in China to supply more than 300 million Chinese smokers, but is virtually unheard of outside of China.

Given this strong government control, the use of tax stamps is not considered necessary. However, because of its massive consumption levels, the day China does decide to use stamps, it will completely transform the global tax stamp industry.

In India, plans by the state excise departments of Goa and Rajasthan to introduce holographic tax stamps on alcohol products in 2020 has brought the number of individual states/union territories in India that use tax stamps to 25.

Based on 2018 consumption figures, the country’s annual tax stamp requirements were in the region of 4 billion stamps for spirits (based on 75cl bottles), 70 million for wine and 8.5 billion for beer (based on 33cl bottles/cans). By 2023, these figures are projected to grow to 4.7 billion, 150 million and 10 billion respectively.

However, given that the majority of people consume alcohol in much smaller containers than elsewhere in the world, the current annual production volumes of spirits and wine tax stamps in the country are reported to be more in the region of 22 billion stamps. This makes India the largest market in Asia and the largest in the world for alcohol stamps (it currently doesn’t use tobacco stamps).

In most cases, the stamps consist of a full-face, polyester-based holographic label, commonly known as the Holographic Excise Adhesive Label (HEAL). The first state to introduce the HEAL (produced by Holostik) was Tamil Nadu, in 1999, and this quickly developed into widespread adoption across the country.

The labels are manufactured in different coloured foils, which are specific to the type of alcoholic beverage they are affixed to. They are also printed with variable codes comprising sequential numbers as well as representing specific data.

The labels also include other overt and covert security features in line with individual state requirements. For instance, some states have incorporated 3D holographic mirrors and taggants into their labels.

Indonesia’s Directorate General of Customs and Excise (DGCE) is a longstanding user of tax stamps on tobacco and alcohol products. Both stamps are supplied by the consortium of Perum Peruri, Padalarang and Pura Group.

Pura Group is a privately-owned company that makes the hologram stripe for the stamps which it applies onto paper supplied by Padalarang, with the final printing of the stamps being carried out by Perum Peruri, the state-owned security printing and minting organisation.

The main overt security feature on the stamps is provided by a hologram which incorporates a number of additional features, including microtext, nano-shapes, chanelling effect, a taggant that can be read by a special device supplied by Pura Group, and a chemical reactive feature for forensic analysis.

The stamp itself includes security features embedded in the paper, in the form of fluorescent fibres and a watermark, as well as printed features including ‘INDONESIA’ microtext, UV-visible features, guilloche printing, and a hidden feature that can only be authenticated by DGCE officers.

There is currently no track and trace system in place for excisable products in Indonesia, one of the reasons for this being that the majority of illegal cigarettes are provided by unregistered manufacturers. In addition, there are more than 100 registered cigarette manufacturers in the country and the price levels between the different provinces are relatively equal.

In Malaysia, the Royal Malaysian Customs Department (RMC) uses a comprehensive tax stamp and traceability programme, provided by Lembah Sari and based on SICPA technology. The programme covers all imported and locally produced cigarette packs and imported beer, wine and spirits (including local bottlers).

Each tax stamp is embedded with material and digital information security. The material security is multi-layered with overt, semi-covert, and covert features, while information security is provided by a unique human-readable code – which can be used in conjunction with a mobile app – and an invisible 2D barcode for use by inspectors.

The flower motif on the stamp provides overt security in the form of a turquoise to purple colour shift and covert security is provided by a colourless machine-readable feature embedded in the tax stamp.

In addition, the stamps carry a bi-fluorescing UV feature. Forensic security is provided by a covert marker embedded in the invisible 2D barcode.

The tax stamps also carry an anti-copy QR code that is validated using a free smartphone app, designed to give the general public access to information such as product brand name, importer/ manufacturer details, and market type (ie. import or domestic).

As for RMC officers, they can inspect individual products with a handheld mobile inspection reader, intended for their exclusive, nationwide use. The reader authenticates the stamp by detecting the presence of a covert marker in the 2D barcode and verifies the information contained in the code. The reader is equipped with GPS functionality to capture the location of inspection activities in the field that require observation, which are then uploaded to a central database.

The system consists of a single web-based platform, offering an end-to-end solution for RMC officers to trace the lifecycle of every single tax stamp (and by association the product it is attached to).

The stamps are applied to each product and activated by the importer or manufacturer, using a code scanning and activation device. This is done before the product leaves the bonded warehouse. The activation links the unique code of the tax stamp to the product’s stock-keeping unit, thereby preventing volume-based tax misdeclarations (eg. declaring the stamp as applied to 33cl instead of 50cl bottles).

Since the implementation of the new system in 2015, RMC has collected 1.97 billion ringgits ($475 million) in import and excise duties for alcohol products, which is 250 million ringgits ($60 million) more than that collected in 2014. As for tobacco, 3.66 billion ringgits ($880 million) were collected in 2015, which was 40 million ringgits ($10 million) more than in 2014.

Sri Lanka implemented tax stamps for the first time in 2019, on imported and domestically manufactured alcohol products, using high-security printed stamps and an accompanying traceability system.

The Excise Department of Sri Lanka (EDSL) is responsible for implementing the Fool Proof Stamping Solution, while the Sri Lanka Customs ensures that the stamps are affixed on all imported alcohol products and has the authority to verify and authenticate products carrying the stamps.

One stamp has been designed for each product category, which comprise imported and local foreign wine and liquor, imported and local beer, imported miniature foreign liquor, and local liquor.

Manufacturers with high-speed production lines have, however, opted to use direct tax marks as opposed to labels. The main overt security feature on the stamps is a holographic stripe. The prime contractor for the system is Madras Security Printers.

The stamps are encoded on the premises of EDSL and offer real-time online as well as offline tracing. Inspectors are provided with dedicated handheld devices for scanning the QR code on the stamps, and consumers and other stakeholders can use a mobile app to check the code.

This article is based on the new report ‘Tax Stamps & Traceability: A Market Analysis and Technical Update’, containing comprehensive country and market analyses and technology reviews on this growing and evolving industry.