What should be the cigarette tax structure for FY2022?
Tobacco is a leading cause of death, disease and disability around the world with more than eight million deaths attributed to its use every year.
According to the 2017 Global Adult Tobacco Survey (GATS), around 35.3 per cent, or 37.8 million, adults in Bangladesh consume tobacco products such as cigarettes, biri, chewing tobacco, and so on.
The GATS is a global standard protocol for systematically monitoring adult tobacco use and tracking key tobacco control indicators.
For tobacco control, two specified targets of Sustainable Development Goals (SDGs) are highly relevant.
The first is strengthening the implementation of the World Health Organisation (WHO) Framework Convention on Tobacco Control (FCTC) while the second is reducing premature mortality from non-communicable diseases by 30 per cent.
Furthermore, the Addis Ababa Action Agenda, which aims to provide a global framework for financing SDGs, also highlights tax and price measures on tobacco as key mechanisms to reduce demand and save lives while increasing domestic resources for development.
Among the various tobacco control interventions, raising excise taxes has been identified as the most effective as well as the most cost-effective measure to reduce consumption.
However, evidence shows that tobacco taxes are still the most underutilized control policy with only 14 per cent of the world's population being covered by sufficiently high tobacco taxes.
Delving deeper into the GATS results show that the percentage of adult cigarette smokers in 2009 was 14.2 per cent. It remained about the same at 14 per cent in the 2017 GATS result. But the total number of smokers has in fact gone up from 13.5 million to 15 million in this period.
So the question arises that why has cigarette use stayed the same despite an increase in prices between 2009 and 2017. This question can be answered by examining the current tax structure of cigarettes in Bangladesh.
The current cigarette tax structure is a complex multi-tiered ad valorem tax system with a low tax base and large variation in prices and taxes.
For a significant increase in revenue, the focus of this paper is on two considerations: (1) increasing the supplementary duty on low-tier cigarettes, and (2) introducing specific tax along with the ad valorem system.
Data from the National Board of Revenue (NBR) shows that the market share of medium-tier cigarettes declined from 27 per cent in fiscal 2010-11 to 12 per cent in fiscal 2019-20.
On the other hand, the market share of low-tier cigarettes increased from 57 per cent in fiscal 2010-11 to 72 per cent in fiscal 2019-20. The large price gap between medium and low tiers resulted in switching from the medium to the low segment.
However, corresponding to the market share of the low-tier (72 per cent), the revenue share was about 48 per cent in fiscal 2019-20.
The only way to secure higher additional revenue is to increase the supplementary duty rate in the lower segment.
The bulk of the tax base in the country is in the lower segment. This segment is stagnant or declining in volume terms, and cigarettes are currently undertaxed compared to other segments.
The NBR needs to change the distribution of a 10-stick pack value in the lower segment. A WHO simulated results show that raising Maximum Retail Prices (MRPs) and SD maximize additional revenues in the lower segment.
A study published in the Tobacco Control (April 2021) shows that significant increases in cigarette prices at the lower segment would effectively reduce cigarette consumption among the people having low expenditure, improve health equity and enhance government revenue in Bangladesh.
Introduction of specific taxes
The advantages of specific taxes over ad valorem taxes are the following: (1) the introduction of specific excise allows for a predictable revenue, (2) it is easy to determine the amount of the tax, (3) it is easy to administer, and (4) if specific taxes are increased on a regular basis, prices will go up and consumption will go down.
Two case studies, one from Thailand and the other from Sri Lanka, have highlighted the importance of introducing specific taxes in cigarette taxation.
Case study: Thailand
In 2014, Thailand first introduced a minimum specific excise to guarantee a floor for revenues and then in 2017, introduced a more substantial reform by introducing a specific component of excise tax (a component that is now equivalent to 40 per cent of the retail price). As a result, it continues to collect more revenue.
Case study: Sri Lanka
Sri Lanka applies a specific excise on cigarettes and has been consistently increasing the rate, which has led to increased prices, reduced affordability and increased revenues.
Bangladesh has committed to achieving tobacco-related targets under the Global Action Plan for the Prevention and Control of non-communicable diseases and SDGs.
Significant increases in prices and taxes on low-tier cigarettes and introducing a specific tax component as recommended in this paper are cost-effective ways to reach those targets. It will also be a major step towards achieving the vision of a tobacco free Bangladesh by 2040.
At the same time, tobacco tax reforms will generate significant additional revenue to finance Bangladesh's health and development priorities. This is a clear 'win-win' for the government and people of Bangladesh.
Nasiruddin Ahmed is a former chairman of the National Board of Revenue. He can be reached by email: [email protected]