Electronic toll collection (ETC) with combined information and communication technology has become a major concern in the intelligent transportation systems. In this paper, an efficient design of ETC system is proposed, which incorporates automatic vehicle classification, identification, and violation enforcement. In the proposed design, to enhance the level of security in data communication, a two stage protocols based on digital watermarking and encryption algorithms are introduced. Moreover, a short message service (SMS) based notification system is proposed to facilitate user convenience. A prototype of the proposed system is developed and found to meet the desired specifications. Here use of simple infrared technology minimizes both overall cost and complexity. In the design of the prototype, aspects related to the real life implementation have been taken into consideration. From a comparative performance analysis, it is found that the proposed scheme is superior to some of the existing methods in terms of advanced technological features, security, overall cost, and ease of implementation.