The rising trade in illicit cigarettes, alcohol

If there is one sector that is highly regulated in Uganda, it’s the tobacco industry and, by extension, cigarette trading. 

This regulatory framework is not unique to Uganda - it reflects a global push to reduce cigarette smoking and related health conditions, including cancer.

Yet, despite these efforts, the illicit trade in cigarettes continues to pose a significant challenge, growing even in the face of 
strengthened regulations on access, sale, and branding. Reports from across the industry illustrate the risks this poses to consumers, legitimate businesses, and the government.

According to financial disclosures from British American Tobacco Uganda (BATU), third-party research suggests an increase in illicit trade, estimating that such activity accounted for 34% of the cigarettes on the market by June 2024, up from 29 percent in December 2022. 

This growth is believed to cost government approximately Shs35b in lost revenue, while simultaneously undermining legitimate industry efforts.

Illicit cigarettes often lack required tax stamps, feature falsified or missing health warnings, and are sold at lower prices, making them attractive to consumers and difficult to trace. 

This, thus calls for continued efforts to strengthen enforcement and compliance, particularly through comprehensive tracking systems, such as digital tracking solutions, which ensure that all legitimate cigarettes on the market bear traceable stamps.

However, the challenge is not confined to tobacco. 
The alcohol market faces a similar threat, and even worse, with a 2024 study by the Private Sector Foundation Uganda (PSFU) revealing that 64.7% of alcohol in the market is illicit, which resulted in an estimated Shs1.6 trillion loss in revenue for Uganda Revenue Authority (URA). 

Other reports, including one by Euromonitor, have confirmed this trend, valuing the illicit alcohol trade at $1.91b between 2017 and 2020, translating into an average tax loss of $458m annually. 
According to industry studies, counterfeit and illegal brands contribute more than 40 percent of alcohol sector losses, followed by unregulated homebrews and smuggling. 

Spirits remain the most counterfeited products. 

Curbing illicit trade  

While URA has traditionally focused on large, formal businesses, there is a growing need to monitor medium- and small-scale players, where compliance and audit trails remain weak.

Implemented in 2019 in Uganda, the digital tax stamps system has been instrumental in this effort. 
In its first phase, digital tax stamps registered 119 manufacturers and 55 importers across six excise duty categories. 
Within two years, however, the register expanded to 689 manufacturers and 212 importers, illustrating a substantial increase in compliance and taxpayer visibility.

Speaking at the launch of a report on the impact of digital tax stamps, commissioned by PSFU last year, URA Commissioner General John Musinguzi Rujooki, said digital tracking solutions were instrumental in eliminating illicit products and creating fair competition.  

For instance, he said, manufacturers of Kombuchas, who had for a long time not paid taxes, yet were taking up a sizeable market, had started to comply, while those that had refused to comply had closed. 
This, he said, was good because it was achieving the intended objective of cleaning the market for tax-paid products and increasing sales of those who pay tax. 

Isaac Arinaitwe, the Ministry of Finance principal economist, has said previously that digital tax stamps ensure market integrity by tackling counterfeit and unlicensed goods, which in turn protect public health, improve product standards, and curb illegal trade.

“The stamps help prevent the circulation of counterfeit goods through security codes, tamperproof features, and track-and-trace capabilities. Legitimate businesses benefit from this, as their brands are protected and are no longer undercut by fake products or illicit competitors,” he said. 

By curbing revenue leakages, Arinaitwe adds, digital tax stamps generate higher tax revenues for government. 
Revenue from digital tax stamps analysis assessments, new penal tax, and penal tax arrears was Shs16.17b during the 2023/24 financial year, while enforcement operations during the period led to a recovery of Shs20.98b as a consequence of 1,038 seizures. 

This benefits the private sector by establishing a fairer, more predictable business climate.
However, to effectively battle illicit trade, government has pledged to continue supporting and enhancing the digital tax stamps programme and other measures designed to increase tax compliance and reduce revenue leakage. 

Godson Mwesigye, the URA assistant commissioner for enforcement, said the Authority would request that cigarette manufacturers in Uganda provide batch numbers for their products. 
This measure, he said, would allow URA to track and trace cigarette products more effectively, ensuring they comply with established tax rules and regulations.

Additionally, URA will continue to roll out the digital tax stamps system as part of its broader strategy to combat illegal trade and enhance tax compliance. 

While challenges remain, it is clear that digital tax stamps have positioned Uganda on a stronger footing in the fight against illicit trade. 

With sustained efforts and collaboration, the country can continue to close the gaps that illicit actors have long exploited to disadvantage genuine trade. 

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