Tax Stamps, Track & Trace, Real-Time Data – Key Ingredients for a Fully Functioning System, Say Global Bodies

In July, the WHO Framework Convention on Tobacco Control (FCTC) held a webinar on the benefits of track and trace systems as tools in tobacco tax administration, as well as the best practices for implementing such systems.

The webinar was held in response to growing demand from parties to the FCTC and its Protocol to Eliminate Illicit Trade in Tobacco Products. The parties are calling for support in meeting the challenge posed by illicit trade as well as the challenge of implementing the provisions of the Protocol.

The webinar included speakers from the World Bank and the economic research group Tobacconomics (from the University of Illinois at Chicago) – both strong supporters of secure tobacco track and trace systems and real-time production monitoring. Tobacconomics, in particular, also referred to the use of tax stamps as a secure measure for applying unique identification to tobacco products.

Track and trace is ‘good revenue collector’, says World Bank

The World Bank speaker was José Eduardo Gutiérrez Ossio, Senior Public Sector Specialist. He emphasised the need for tobacco track and trace systems to be under the control of revenue authorities so that the collection of taxes and security of transactions could be assured. For this to happen, he said the system needed to be based on:

  • Real-time secured data transmission from all production and import lines to the tax administration system.

  • Track and trace code activation on production and import lines.

  • Linking the track and trace code to stock and logistics codes.

  • Integration of track and trace data with tax administration systems so as to be able to compare this data with excise declarations.

Mr Gutiérrez Ossio explained that the reason why the World Bank promotes track and trace systems is because, when properly implemented, they have proven to be good revenue collectors.

For instance, the Kenya Revenue Authority, which employs serialised, multilevel security tax stamps together with a traceability system and automated monitoring of domestic production lines, recorded a 20% average annual increase in cigarette excise tax collections between 2013-2016. And for imported cigarettes, collections increased by 4,728% in the space of just six months.

This conviction by the World Bank in the effectiveness of track and trace is evidenced by one of the provisions in a Pakistan government project called Pakistan Raises Revenue (PRR) – which is supported by the World Bank. The project aims to sustainably increase domestic revenue by broadening the tax base, in a country where tax collections don’t even cover the government’s main service delivery functions.

Within the PRR project, there is a Disbursement Linked Indicator (DLI), requiring Pakistan to implement track and trace and electronic production monitoring in key sectors at risk of tax evasion, including tobacco, beverages, sugar, cement and fertiliser. Once such a system has been implemented, this will trigger the disbursement of funding from the World Bank.

Security, inclusiveness and real-time data are key, says Tobacconomics

The speaker from Tobacconomics was Research Professor Jeffrey Drope. One of Tobacconomics current projects – funded by the Bloomberg Initiative to Reduce Tobacco Use – is to build the capacity of think tanks in low- and middle-income countries to provide evidence-based support for effective tobacco taxes.

Prof Drope began his presentation by concurring with the World Bank speaker that fully functioning track and trace systems enhance the overall success of tobacco taxation programmes.

He also stressed the importance of having both a tracking and a tracing function in place, whereby tracking refers to the systematic monitoring of a product as it moves forward through the supply chain, and tracing refers to the recreation of the route taken by a product, from retailer back to manufacturer, in order to identify movements along the chain that may need investigating.

The supply chain needs to be secured at every point in the system, from manufacturer to distributor to wholesaler to retailer, said Prof Drope. All product movements need to be tracked, no matter how the products are configured – whether in cartons, crates, or as individual packages at retail level. Any gaps in the system risk being used by pernicious forces to insert non-tax-paid products into the supply chain.

Security in tax stamps

He then went on to describe the core function of a track and trace system, which is to uniquely identify every single tobacco product, by marking it with a unique, random, often numeric digital code.

Security is extremely important here, he stressed. It should be impossible for external stakeholders to decrypt and duplicate identification markers. Therefore overt and covert features, such as security paper, holographic strips, complex print designs, and invisible ink should be used.

To illustrate, he used an image of a tax stamp printed with a guilloche pattern and microtext, an optical feature for public recognition, an invisible code that he referred to as FCTC-compliant, and a visible alphanumeric code described as being for international use.

All products need to be included in the system, he added. For instance, some countries don’t cover imports or exports and this can lead to extensive leakage. If imported goods are not monitored, this opens the door to illicit trade. Similarly, unmarked goods intended for export may find their way into the domestic supply chain without having had taxes paid on them.

Cost-effectiveness is less important

The unique marks need to be easily producible, given that enormous quantities are required to cover every single cigarette pack, he said. And they also need to be cost-effective – although this is a less important requirement given that the costs should be borne by manufacturers rather than governments.

Prof Drope echoed Mr Gutiérrez Ossio’s advice that since revenue authorities need to know what’s going in the factories at all times, there should be constant real-time production data transmission to the server of these authorities.

Therefore, the codes on the packs, together with the aggregated codes on the cartons, cases and pallets, need to be activated on the production line. In this way, shipments can be tracked along the supply chain so it is easy to see at what point some shipments may disappear into the illicit market.

Prof Drope advised that in the countries where he has been working, the weakest implementation of track and trace systems are at the factory level, where tax paid goods leave through the front door while non-tax-paid, illicit goods sneak out the back.

He also observed that while countries may actively gather track and trace data, they often don’t analyse it, which is unfortunate in that such data provides immediate insight into where enforcement efforts should be focused. Countries that perform well in this area have established dedicated data analysis teams that can look at data quickly and transmit any issues to enforcement officials.

The ultimate goal is to have a global system in place that would track and trace every single cigarette pack produced in the world – given that the supply chain of illicit goods is also very much a global affair.

Who pays?

Regarding the question of who should pay for the track and trace system, Prof Drope advised that the best practice would be for the government to pay for it upfront and then recover the cost through the sale of compulsory tax stamps to manufacturers.

Another, but less optimal, option would be for the vendor of the system to pay most or all of the upfront costs in return for a share of the revenue collected from tax stamp sales.

Industry involvement

On a final note, Prof Drope warned of systems created or supported by major tobacco companies, which are subsequently promoted to governments through front groups and third party companies.

He advised that there is no compelling reason for the industry to be involved in track and trace systems, but many reasons to avoid such involvement, because of the conflict of interest related to ‘selfmonitoring’.

Being able to manage data from such systems creates opportunities to cheat the system, he advised, adding that Tobacconomics possessed extensive research data demonstrating the major role played by the industry in promoting and supporting illicit trade across the world.

Prof Drope therefore urged governments not to engage with any system known to have been developed or funded by a tobacco company.

The full webinar recording is available at