Excise taxes and digital tax stamps: Do digital tax stamps work?

Working paper Tax, State and State Effectiveness

To effectively administer tax policy, tax administration must adjust to manage behavioural responses by firms. In financial year 2019/20, the Government of Uganda implemented a policy that required manufactures of some excisable goods to affix Digital Tax Stamps (DTS). In this paper, monthly excise tax returns data for four financial years are used to estimate the effect of introducing DTS on firms’ ex-factory prices, sales revenues, and Government excise tax revenues.

While allowing for non-parallel linear time trends, treated firms respond to the introduction of DTS by decreasing their ex-factory prices relative to the comparison group firms, more so when they incur the cost for the stamps. In addition, treated firms experience a decrease in sales revenues in the first year post-DTS, however, the effects become positive in the second year after the policy intervention. With negative effects of DTS on both ex-factory prices and sales revenues in the first year, Government excise tax revenues from treated firms decreased by 24.8% relative to the comparison group in that time. However, the gains in firms’ sales revenues in the second year post-DTS offset the negative effects decreases in ex-factory prices. This resulted in a 29.3% increase in Government excise tax revenues from treated firms relative to the comparison group.

These results suggest that firms and tax administration may take time to embrace and adopt new technologies, but eventually such policy interventions tend to improve tax revenue mobilisation efforts.