VAT collection highly dependent on cigarettes

Bangladesh continues to remain highly dependent on cigarette and tobacco products for its value-added tax (VAT) collection as the health hazards account for nearly one-third of the indirect tax generated by the domestic market.

Data from the National Board of Revenue (NBR) showed that Tk 28,800 crore came in the form of value added tax and supplementary duty (SD) on cigarettes in fiscal 2020-21.

The amount was 30 per cent of Tk 97,500 crore collected as VAT and supplementary duty in the same fiscal.

The share of cigarettes in total indirect tax remained the same in fiscal 2019-20.

The NBR got Tk 25,360 crore from cigarettes or 30 per cent of Tk 84,467 crore collected in total as VAT and SD that year.

And if anyone looks back at the NBR's collection figure, the high share of cigarette in VAT and SD collection from the local market would be clear, which signifies a narrow base of VAT collection.

For instance, the share of cigarette in indirect tax collection from the domestic market was 32 per cent in fiscal 2018-19.

"High dependence on cigarette is not a good news for the next generation," said Nasiruddin Ahmed, former chairman of the NBR.

A 2019 study by Bangladesh Cancer Society showed that tobacco consumption caused 126,000 deaths in Bangladesh. The figure was 13.5 per cent of deaths from all causes in Bangladesh in 2018.

In addition, the study said 15 lakh adults were suffering from diseases attributable to tobacco use and nearly 61,000 children were suffering from diseases due to exposure to secondhand smoke.

Tobacco-induced deaths and diseases alone cost the economy of Bangladesh around Tk 30,560 crore a year, which was equivalent to 1.4 per cent of its national GDP in 2017-18, the study finds.

In that year, total collection of VAT and SD from cigarette was nearly Tk 21,980 crore -- less than the estimated cost of tobacco on health.

Ahmed said the base of VAT was narrow and the revenue authority needs to trim down the exemptions to improve collections from other sectors. The government should start taking steps now in order to make the country tobacco-free by 2041.

He said cigarette acts as a secured source of revenue. As such, revenue officials usually bank on this source to achieve the revenue collection target set by the government to meet budgetary expenditure, he said.

Businesses usually have demands for various exemption. So the NBR has to find ways to achieve increased tax target, he said.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said cigarettes account for a good amount of tax as governments across the world impose high taxes on this element hazardous to health to discourage its use.

In Bangladesh, apart from VAT and SD, cigarette companies also pay the highest corporate taxes, he said.

"So it seems that the government is addicted to cigarette revenue and it will continue," said Mansur, but added that the share of cigarette revenue in the total should come down with the expansion of the economy.

"Share of other sectors should increase," he said.

Mansur, a former economist at International Monetary Fund, suggested the government use an existing health surcharge tax to create awareness about the negative effects of tobacco.

A senior official of Large Taxpayers' Unit (LTU), VAT, the main collector from cigarette, said revenue collection from mobile, banking and pharmaceuticals has increasing in recent years and share of these sectors in total VAT and SD collection has been growing.

For example, share of mobile in total VAT collection by the LTU, VAT rose to 9 per cent in fiscal year 2020-21 from 7 per cent two years ago, according to LTU data.

"Insurance, electricity and cement are also coming up," said the official, adding, "It appears that contribution of other sectors in total revenue will increase. What is needed is policy support."

Md Masud Sadiq, member of VAT Policy at the NBR, said the NBR was increasing taxes to discourage cigarette and tobacco use. But it is not a healthy sign for revenue, he said, but added that collection of VAT from other sectors was increasing.

"We are increasing the base of VAT. Collection from other sectors will increase with expansion of business activities," he said.