Tightening up the Ugandan tax net key to boosting public health

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In a very encouraging sign for public health, the Ugandan government has announced that the revenue gleaned from taxes on alcohol and soft drinks will be channeled into a fund to provide lifesaving HIV treatment. Unfortunately, making sure that the monies will actually be collected so that they can be put to this good use poses a challenge in and of itself.

Like many of its neighboring countries, Uganda is plagued by fake and counterfeit goods which slip through the tax net, including illicit alcohol. While the government is putting plans in place to clamp down on this prevalent illegal trade, the alcohol industry itself is pushing back on such initiatives, citing fears over elevated production costs and a lack of consultation. Gaining their consent will be crucial to increasing tax compliance, swelling government coffers and boosting public health.

The ubiquity of illicit trade

A recent survey conducted by the Uganda National Bureau of Standards (UNBS) found that 54% of products on the Ugandan market are either fake or counterfeit, leading to a high probability of substandard electrical appliances, furniture and foodstuffs making their way into consumer hands. This is especially conspicuous in the lucrative alcohol industry; 68% of Ugandan alcohol is illegal and 61% is unbranded, meaning that the state does not see any revenue from these sales.

What’s more, the burden of illicit trade spreads beyond Uganda’s borders. Contraband alcohol, often sold in individual sachets, infiltrates neighboring markets like Kenya, where the prohibited product can still be found in abundance despite a sachet ban which came into force in 2005. Indeed, a report from the International Alliance for Responsible Drinking concluded that 60% of Kenyan alcohol is illegal and harmful to human health, a scourge which sources claim costs the country $1.96 billion every year. A significant proportion of these illicit beverages have been smuggled in from Uganda, where inefficient regulation and tax collection makes them dirt cheap.

A myriad of concerning consequences

The consequences of this widespread illegal trade go far beyond skimming off the government budget. The prevalence of illegal brews inhibits the growth of the industry as a whole, since legitimate players are at a distinct disadvantage. The alcohol black market puts millions of jobs at stake as compliant businesses struggle to compete with their illegal counterparts, who can offer stronger liquor at less than half the price.

Perhaps most troubling of all, the effect of substandard-quality alcohol on public health can be catastrophic, as a swath of tragic incidents around the world has shown. Last year, more than 100 people were killed in Indonesia from alcohol laced with cough medicine and mosquito repellent. In February, Mexican police seized over 20,000 gallons of black market alcohol, 235 gallons of which contained dangerously high levels of methanol. The substance is highly toxic and can cause blindness, severe liver damage and death. In September, over 300 Iranians were poisoned with bootlegged alcohol, killing at least 27. Nor has Uganda been immune—back in 2010, more than a hundred people went suddenly blind and then died after drinking contraband alcohol laced with methanol. Clearly, the human cost is every bit as serious as the economic one.

Eradicating evasion

The two problems can’t be viewed in isolation, either. Certain countries have previously tried to tackle the monetary side of things on its own with disastrous consequences. In Belgium, for example, a 40% hike in alcohol excise in 2015 incentivized the black market even further, leading to a loss of €20 million in revenue. The same phenomenon occurred in Greece that year; a 125% rise in taxation contributed to a €17 million deficit in the tax revenue.

To their credit, the Ugandan authorities have not focused solely on the bottom line in terms of income, but are intent on introducing a digital stamp scheme which will allow anyone – manufacturers, distributors, retailers and consumers – to verify authenticity of a product at every stage of the supply chain. Unfortunately, the Uganda Alcohol Industry Association (UAIA) has resisted the initiative, claiming that the scheme will inflict additional production costs onto manufacturers. The Ugandan tax authority has argued that the various benefits of the scheme to traders, consumers and the government significantly outweigh the cost of affixing the stamps.

The UAIA’s worries might be assuaged by taking a look at the example of other African nations. Similar concerns were initially raised by the alcohol industry in Ghana, where the sector projected a loss of 5,000 jobs and untold revenue, and in Kenya, where manufacturers of alcoholic drinks argued that modification of production lines would be too costly to be practical.

In both countries, the industry has since warmed to the tax stamps. Kenya in particular has shown remarkable progress in cracking down on illicit trade and tax evasion since implementing its Excisable Goods Management Scheme (EGMS) on alcoholic beverages. Between 2014/15 and 2015/16, the domestic excise revenue generated by products monitored by the EGMS shot up by 43%, while tax revenues on the whole increased by 28%.

Profitability breeds sustainability

A similar about-face among Ugandan alcohol producers is necessary if the government is to reap full potential from a taxation system which is, at present, all too porous. Tightening up that net will be instrumental in garnering maximum revenue from a lucrative industry, as well as promoting growth in the sector and boosting public health in one fell swoop.

Indeed, the newly-announced plans to funnel funds into HIV treatment programs provide just one more reason why industry cooperation is imperative. With 68% of current funding for such programs coming from international donors and 20% from sufferers themselves, maintaining these essential services is not sustainable in their current form. Ensuring that existing taxes are collected efficiently so that they can be put to good use, while at the same time cracking down on dangerous illegal brews, is a crucial step forward for Uganda.