Can the tobacco tax structure cut back tobacco use and raise government revenue?

Bangladesh is one of the largest tobacco consumers in the world with 37.8 million adults aged 15 years and above -- who are about 35.3 per cent of the country's population -- consuming tobacco products, according to the Global Adult Tobacco Survey (GATS) 2017.

Although the overall prevalence of tobacco use declined by 18.5 per cent from 2009 to 2107, the consumption of cigarettes and smokeless tobacco (SLT) remains very high.

The economic cost of tobacco use was estimated at Tk 30,570 crore ($3.6 billion), which was about 1.4 per cent of Bangladesh's GDP in 2018.

A tobacco tax structure matters because how tobacco taxes are structured has implication for protecting public health and enhancing government revenue.

Increases in tobacco taxes that result in significant increases in prices are highly effective in reducing tobacco use, particularly among the youth and the poor.

At the same time, increasing tobacco taxes can bring in new revenues to finance health and development efforts.

In Bangladesh, the government has developed a complex tax structure of tobacco products, which is characterised by multi-tiered ad valorem tax system, low tax base and large variations in prices and taxes within and across different tobacco products.

These factors have contributed to the affordability of tobacco products in Bangladesh.

TOBACCO PRICES AND TAXES

Available evidence shows that tobacco prices and taxes are much lower in Bangladesh compared with several developing countries.

Different tax rates for different tobacco products provide incentives for tax avoidance as manufacturers can alter their pricing or production decisions in order to avoid higher tax liabilities that can lead to revenue loss for the government.

PRODUCT SUBSTITUTION

Large price gaps between brands create opportunities for consumers to switch to cheaper brands in response to increased taxes.

In Bangladesh, the differential tax treatment has led to product substitution from the medium tier to the low tier of cigarette.

The market share of the low tier is more than 67 per cent in fiscal 2019-20 while that of medium tier is 14 per cent in the same period.

The effect of the product substitution is evident from the fact that the revenue share of the low tier of cigarette is about 44 per cent in fiscal 2019-20 while that of medium is 17 per cent.

The overwhelming share (more than 67 per cent) of low tier of cigarettes in the market leads to loss of government revenue as the low-priced tier yields lower revenue (about 44 per cent in fiscal 2019-20).

INFORMALITY AND HETEROGENEITY

OF SLT PRODUCTS

In Bangladesh, 22 million (20.6 per cent) adult people use SLT products, of whom 16.2 per cent are men and 24.8 per cent are women, according to GATS 2017.

SLT is an area of growing concern for public health and it contributes to only 0.22 per cent of the NBR tobacco revenue.

However, there exists challenges of regulating SLT products because of heterogeneity of such products, which are often manufactured in small and unlicenced units, with tax evasion and illicit trade being common.

Therefore, SLT manufacturing units need to be formalised by bringing them under the registration process.

SPECIFIC VS AD VALOREM TAXES

•   With respect to the impact on tobacco product prices, ad valorem taxes result in greater price differentials between high and low-priced products than in the case for a single specific tax.

Ad valorem tax creates more opportunities for users to switch down to cheaper brands in response to tax increase resulting in reduction in revenue.

•   In terms of revenue, specific tax is likely to generate more stable and predictable revenue than ad valorem tax.

•   Specific excise taxes tend to be easier to administer than ad valorem tax.

•   Empirical evidence from different countries show that specific taxes are more effective than ad valorem taxes in reducing tobacco use and raising tax revenue.

POLICY IMPLICATIONS

The results of a recent study suggest that the overall consumption of smoking tobacco products does respond significantly to price changes.

The poor households are found to be more responsive to the changes in the prices of cigarettes and biris than the rich households.

By raising prices, cigarette tax increase would prevent cigarette smoking initiation, promote cessation, lower consumption among the continuing smokers, and reduce the death, disease, and economic costs of smoking.

Thus the simulation result of the study supports that a policy intervention of reducing the existing four price tiers of cigarettes to two and introducing a specific tax component for all tiers would serve the dual purpose of reducing tobacco consumption and enhancing government revenue.

Therefore, using the tobacco tax structure by phasing out of the tiers of tobacco products and introducing a specific tax component for all tobacco products would serve the dual purpose of reducing tobacco use and enhancing government revenue.

Measures may also be taken to formalise SLT manufacturing units by bringing them under the registration process.

The writer is the former chairman of the National Board of Revenue