Tobacco business is highly profitable for tobacco industries in Bangladesh. The profit of existing tobacco industries is on an increasing trend. A recent newspaper report shows that a leading multinational tobacco industry’s market capitalisation has gone up to BDT 23,697 crore in March 2019, which is the second highest in the Dhaka Stock Exchange. Japan Tobacco has recently chosen Bangladesh to expand their global tobacco sales and invested BDT 12,438 crore in tobacco industry. The excess profits enjoyed by tobacco companies suggest the scope for government to re-structure the existing tax systems and raising tobacco taxes further to reduce consumption and increase tax revenue simultaneously.
Tobacco industries create a favourable environment to promote tobacco use, thereby increasing their profit. They use sophisticated strategies to keep prices cheap in order to encourage uptake and drive up sales. Lobbying to keep tobacco taxes low is one such strategy. Despite the high-level political commitment of the government to make the country tobacco-free by the year 2040, ‘tobacco’ remains a profitable business in Bangladesh. The complex tobacco tax structure and weak tax administration are major reasons, among others, of high profits and the consequent sustained investments in tobacco industry in Bangladesh.
Price and tax increases are the most effective means of reducing tobacco use. However, the existing tobacco tax structures benefitted the tobacco industries in different ways in last ten years in Bangladesh.
The complex multi-tiered ad valorem tax system of cigarette allowed large price differential between the highest and the lowest priced brands. Large variations in tax bases and tax rates between cigarette brands encouraged the leading cigarette industries to effectively target low-income socio-economic groups and increase market share of low-price cigarette brands.
The enormous growth of market share of cheap brands in last decade encouraged the smokers to switch from higher-priced to cheaper brands cigarettes instead of quitting. Moreover, this led to increase in cigarette consumption per smoker, and uptake of cheap cigarettes by the poor and youth, leading to harmful health consequences.
The sale of single stick cigarettes also made smoking affordable and accessible particularly for the poor and young. As a result, the intended effect of tobacco tax increases had not been achieved and the consumption of cigarettes among adult male smokers increased from 28.3% in 2009 to 28.7% in 2017, causing a major public health threat. The growing consumption of cigarettes in last ten years, especially the low-priced brands, implies that price and tax increase should be comparable across all tobacco products in order to reduce opportunities for brand and/or product substitution in response to changes in relative prices.
The multi-tiered tax system with different tax rates for different types of cigarettes provides incentives for tax avoidance in Bangladesh, leading to revenue loss for the government and ensuring high profit for the industry.
Moreover, some high-priced cigarette brands are sold in the market at a price higher than printed maximum retail price (MRP), indicating tax evasion and loss of revenue for the government.
Smokeless tobacco (SLT) is an area of growing concern for public health in Bangladesh. Currently, around 25 per cent of adult women and 16 per cent of adult men consume SLT. SLT products are sold in different-sized pack which makes it affordable to the consumers. The tax base for SLT taxation is tariff value, which is still very low in Bangladesh. Tax evasion by zarda and gul industries is large. Many zarda and gul manufacturers are not registered and doing business illegally without paying taxes and VAT to the government. Smokeless tobacco products are also sold in unpacked forms, making it difficult to bring them under tax coverage. Though SLT consumption is very high in Bangladesh, revenue earned from zarda and gul were only 32.5 crore Taka and 1.5 crore Taka respectively in FY 2016-17. The revenue share of SLT products of total tobacco tax is only 0.14 per cent.
Tobacco control experts and advocates recommend simplifying the tax system by reducing the number of cigarette price slabs from four to two. In addition, experts propose to increase the price of lower-tier cigarette, and to impose specific supplementary duty (SD) for all types of tobacco products to ensure that the affordability of tobacco products continues to decline along with reduced profit to the industry.
Specific tax of 5 taka per 10 stick cigarette pack (for both tiers) has been proposed, which will increase total tax share of cigarette to 86 per cent on retail price.
Revenue under specific taxes is relatively more predictable and generally produces a more stable flow of revenue.
Experts also propose to increase the retail price of biris along with increase in ad valorem tax rate across all tiers. It is also suggested to introduce specific tax per pack of biri to ensure 78.1 per cent of tax share on retail price.
sIt is also important to harmonize tax base across all tobacco products. Tobacco control advocates and experts suggest ‘retail price’ to be the tax base for supplementary duty on all tobacco products, and recommend to change the current tax base of zarda and gul from tariff vale to retail price. It has been proposed to increase the tax base and impose specific tax to attain around 78 per cent tax share on retail price of SLT products.
Bangladesh has been able to maintain sustained economic growth in the last decade. Combined efforts of government and non-government organisations resulted in decline in poverty rate and the incidence and depth of poverty, while per capita national income in current price increased to US$1,751 in FY2017/18. Hence, considerable increases in tax base and tax of all tobacco products are required to keep pace with
inflation and rising income of the population.
However, the current tobacco tax structures and tax rate are creating opportunities for tobacco industries to increase profit and undermine the intended public health impact of tobacco taxation. It is expected that implementing the proposed taxation measures will lead to reduction in tobacco consumption and significant improvements in public health, increase in revenue of the government and decline in profit of the tobacco industries in Bangladesh. Increase in price of all types of tobacco products and adoption of appropriate tax systems will discourage tobacco uptake by youth and the poor, reduce the possibility of product/brand switching and encourage users to quit tobacco.
Dr Rumana Huque is a professor of Department of Economics,
Syed Mahbubul Alam Tahin, Technical Advisor, The Union