About two weeks ago, Jeanette Chanda Makgolo, Commissioner General of Botswana Unified Revenue Service (BURS), gathered media house editors at BURS’ opulent boardroom in the Gaborone Central Business District (CBD).
The agenda was to provide an operational update and to inform the nation, through the media, how BURS is progressing in terms of their operational strategy. Chief among issues mentioned by Makgolo was that in this second half (H2) of 2022, the taxman would effect a Track and Trace system on the alcohol industry. This is because they have observed an increase in illicit alcohol smuggled through the borders as well as understatement of volumes produced by some alcohol dealers. Makgolo believes this leads to a situation where taxes are also under-declared, robbing BURS – and the government – of revenue.
The Track and Trace is to enable the taxman to identify each and every alcohol product in the market. The system will result in each and every product being marked at manufacturing and also at port of entry, for imported products. “We will be able to distinguish between smuggled products and the legal ones,” Makgolo said. Asked whether a proper consultation was done with the alcohol industry, she responded in the affirmative. “We have been consulting with the industry since 2016,” she says. “We have agreed on some matters and disagreed on others, especially the pricing aspect where alcohol traders believe the costs will disadvantage their businesses,” she states.
The president of the Botswana Alcohol Industry Association (BAIA), Nico Vos, says the industry appreciates the fact that BURS has been consulting it on implementation of the track and trace solution. “However, it is not true that the major difference is limited to pricing,” Vos said in an interview. “As indicated in previous engagements with both BURS and the Ministry of Finance, the industry feels there has been no impact assessment study undertaken to ensure that the industry and its extensive value chain’s growth, profitability and sustainability are not adversely affected by the envisioned system. “This goes against the spirit of the government’s own Better Regulation Strategy where conducting impact assessment is an integral part of public policy. BAIA therefore, recommends that government suspend implementation of the envisaged track and trace solution and undertake an impact assessment study in line with good regulatory practice.”
This conflicts with Makgolo’s position that the industry was also given a chance to conduct such a study that could be used to inform both the industry and BURS. For this ‘reason,’ she says, BURS will proceed to implement the system. However, according to Vos, the industry believes that if implementation is allowed, complex and unintended consequences, not only the alcohol industry but the economy as a whole, will result. He says the industry’s business case relies on tight margins, economies of scale and highly automated, efficient processes to remain cost effective in order for the business case to remain viable.
As a result, the solution will require heavy capital outlay for production lines to be able to accommodate the system, including operating expenditure investment for manufacturers to procure the fiscal marks. Moreover, says Vos, the application of the proposed solution in a fast-moving packaging environment is physically challenging, disruptive and expensive. “Where it is not feasible to modify the production lines to comply with the proposed solution, especially for imported brands (due to Botswana’s small volumes relative to other markets), these brands will have to be unpacked, physically marked and then re-packed at a great expense to importers, not to mention other challenges such as breakages and theft,” he says.
Vos also fears that the illicit/informal market will grow to fill the gap (due to the increased input costs and unavailability of certain brands for legitimate/tax compliant businesses), which will exacerbate, rather than mitigate, tax evasion as intended. The perceived track and trace solution’s contribution to the government revenue vis-à-vis the costs of implementation will not be as positive as projected, as was seen with the Tanzanian experience.
The president of BAIA is adamant that implementation of the system will have high economic costs – impacting the ability of not only the alcohol industry and its extensive value chain but many businesses in several key growth industries to invest in infrastructure, create employment and, in general, operate in the Botswana market. The consumer will not be spared either. Vos says Batswana should expect significant price increases as a result of increased input costs, as well as loss of certain brands due to complexity of complying with the proposed solution. “The market will be flooded with illicit products, some of them dangerous, exacerbating tax leakages and putting consumer’s lives at risk,” he warns.
Not so, says Makgolo. Chief among factors that motivate implementation of track and trace is high levels of smuggling, as well as under-reportage and understatement of stocks received and sold, thus robbing BURS of taxes. Asked whether there are such cases, Vos says the industry is not aware of the specific situations stated by BURS, adding that businesses under BAIA are good corporate citizens with a reputation to protect and so cannot and will not under-report or understate stock. “However, there could be some isolated cases of not only alcohol but in other sectors such clothing, fuel, pharmaceuticals and so on, hence we have asked for a comprehensive study by an independent and reputable service provider to determine the size of the problem,” he insists. “This will in turn guide on the proposed solution and if it is appropriate for the perceived problem.”
Vos’s views strike a chord with those of the Director of Policy Advocacy at Business Botswana, Dichaba Molobe, who believes that the consultation was not satisfactory. Like Vos, Molobe holds that implementation of such a system will weigh heavily on alcohol traders’ financials and the costs passed on to the consumer. Both Molobe and Vos state that when taxes increase to a point that prices exceed consumers’ purchasing power, illegal production blossoms, dangerous products enter the market and fiscal income dwindles. They say this is the same conclusion reached by Botswana Institute for Development Policy Analysis (BIDPA) in its review of the impact of the Alcohol Levy, which led to its reduction in 2018.
Vos and Molobe converge on the point that the same principle applies in this instance. “Our point of departure (with BURS) has always been that it is vital to first quantify the size of problem of the illicit alcohol in the country leading to smuggling or tax leakages in order to design an effective and targeted solution without unnecessarily penalising licit players in the market. We therefore urge the government to, as a matter of priority, suspend the implementation of the envisaged track and trace solution and undertake an impact assessment study through an independent and reputable service provider in line with good regulatory practice,” says Vos.
If the impact assessment does confirm that smuggling or tax evasion does exist, they add, BURS must consider abolishment of the Alcohol Levy by the government, which would eliminate the appetite for smuggling or tax evasion as local prices will be at par with prices in neighbouring countries. Finally, they say, BURS has the authority to audit, confiscate, prosecute and also recommend suspension or withdrawal of production and trading licences of any culprit who would have been identified as being non-complaint. However, they emphasise, non-compliance of a few should not be used to punish or inconvenience law abiding businesses.
THE TRACK AND TRACE SYSTEM EXPLAINED
Importers of alcoholic beverages like KBL, Distell and Heineken Botswana, as well as all tobacco traders, will need to purchase paper stamps (at a currently proposed cost of P0.25 per stamp from a supplier to be appointed by BURS and affix these stamps to every single bottle, tobacco stick, can or packaged product manufactured or imported in order to enable ease of identification, verification of production volumes and resulting excise payments to BURS. The system will require each and every single bottle to be affixed with paper stamps for BURS to verify production volumes and to also be if the customs taxed to the producer are consistent with the production volume. According to BAIA, affixing the stamps on each bottle will be a labour intensive exercise that will take a lot of time, thus delaying and disrupting distribution patterns.
For a lot of companies that will be importing, the stamp system will be a critical factor. Fears are that fixing stamps may result in product supply disruption. For example, Distell imports cider bottles every day. The manual placement of sticker means that if they expect 3 000 bottles a day, it is highly likely that it cannot be met because of the delay associated with affixing stamps. BAIA’s concern is that this will result in demand targets being missed. Distell produces for Southern Africa – Zambia, Zimbabwe and South Africa, to mention a few. If products destined for Botswana must have marking, a logical plan would be to have a specific line of production that produces stamps affixed Botswana products. This may lead to sacrificing some products for the Botswana market and the consumer may suffer.
From a cost perspective, the normal rules of supply and demand may apply. BAIA says the cost of production is going to increase, and inevitably the price of the product. Supply will diminish and importers reduce what they can import, resulting in prices being driven up disproportionally because there will be increase in demand. Apart from just passing on the cost, there could be an increase in prices. The industry fears that this may encourage smugglers. If products are not available because of the supply disruptions, this will increase the incentives for people to smuggle to meet the demand.
For BURS, customs and excise is the biggest contributor to the government’s budget. BURS’ back is against the wall because VAT is a small component of their collections. Another concern is that non-mining income and VAT together get close to what they get from excise. If excise goes down and profits and sales of wholesalers decrease, there will be ripple effects on income tax. A decrease in production volumes will negatively affect sales and BURS will consequently make less tax revenue from the declining sales.