Rethinking tobacco tax and price

measures
Tobacco use is a major public health concern in Bangladesh and all over the world. It is regarded
as a leading cause of more than 30 fatal diseases in Bangladesh including oral and lung cancer,
cerebrovascular diseases, coronary artery diseases and chronic obstructive pulmonary diseases.
The country is one of the largest tobacco-consuming countries in the world.

According to Global Adult Tobacco Survey (GATS) 2017, currently about 35 percent (37.8
million) adult people use tobacco in Bangladesh. Around 22 million adult people use smokeless
tobacco (SLT, viz. jorda, gul and tobacco leaf) and 19.2 million are smokers (cigarette and bidi).
Among the tobacco users, extremely poor people (who can hardly bear the healthcare costs of
tobacco-related deadly diseases) tend to use tobacco at a much higher rate than high-income
people. The rate of SLT use is much higher among women than men. Growing tobacco addiction
among teenage groups is also a matter of grave concern.

Around 126,000 people die every year due to tobacco-related diseases in Bangladesh. A recent
study titled “Economic Cost of Tobacco Use in Bangladesh: A Health Cost Approach” reveals
that the monetary value of healthcare costs and productivity loss due to tobacco use was Tk
305.6 billion, which was much higher than the government revenue generated from the tobacco
industry (only Tk 228.1 billion). However, there are many other significant costs of tobacco
production and use, such as loss of land productivity, environmental pollution and negative
spillover effects on the health of non-users. Tobacco is regarded as “sin” and “demerit” products
due to its multifaceted and manifold adverse consequences.

Tax and price measures are considered to be effective for reducing tobacco use, which is
supported by empirical evidence. The WHO Framework Convention on Tobacco Control
(FCTC) urges governments to undertake effective tax and price measures to curb tobacco use. In
South Asian Speakers' Summit 2016, Prime Minister Sheikh Hasina pledged to “eliminate” (five
percent) tobacco use in Bangladesh by 2040 and introduce a robust tobacco tax policy which is
yet to be materialised. High prevalence of tobacco use is also regarded as a formidable barrier to
achieving health-related Sustainable Development Goals (SDG 3 specifically). Unfortunately,
little has changed in Bangladesh when it comes to tobacco tax and price measures, due to which
the government has been losing potential revenue from this sector. And tobacco use has not been
declining significantly. 

Ideally, tobacco tax should be set in such a way so that the price goes up and affordability
decreases over time, i.e. share of tobacco cost goes higher as a proportion of the income of users.
Nevertheless, an analysis done by Progga, an anti-tobacco alliance, using the relative income
price method reveals that premium-, high- and medium-brand cigarettes became more affordable
between 2015-16 and 2017-18, while affordability of low-brand cigarettes remained nearly the
same. The country's per-capita income has increased by more than 25 percent during this time,
while the price of cigarettes has not increased accordingly. Therefore, the number of cigarette
smokers has increased by 1.5 million between 2009 and 2017.

Bangladesh's current tobacco tax and price structures are complex and old-fashioned, which must
be substantially improved. In doing so, the following recommendations can be suggested for the
upcoming budget.

First, the present ad valorem method (a tax based on the assessed value of an item) of tobacco
tax (excise duty and VAT) should be substituted with a mixed method—that is, a combination of
ad valorem and specific tax for improving efficiency of taxation and increasing price of all
tobacco products.

Second, the price tiers of cigarettes should be reduced from four to two, i.e. lower and upper
tiers. The maximum retail price (MRP) of the lower tier would be Tk 50 combining the existing
low and medium tiers of Tk 35 and Tk 48 for a pack of cigarettes with 10 sticks. Supplementary
duty (SD) on this tier should be 60 percent. Similarly, at the upper level, the MRP should be Tk
105 for a pack of cigarettes with 10 sticks with 65 percent SD. Specific duty of Tk 5 should be
imposed on both the tiers.

Third, bidi's price and tax should be rationalized by abolishing filter and non-filter tiers. MRP of
one pack of non-filtered bidi with 25 sticks should be Tk 35 with 45 percent SD and Tk 6
specific excise duty. And MRP of one pack of filtered bidi with 20 sticks should be Tk 28 with
45 percent SD and Tk 4.8 specific excise duty.

Fourth, tariff value should be abolished from SLT and mixed tax based on MRP should be
introduced. The MRP of 10 gram of jorda should be fixed at Tk 35 and MRP of 10 gram of gul
should be fixed at Tk 20 on which 45 percent SD should be imposed. The specific duty on these
products should be Tk 5 and Tk 3, respectively. In Bangladesh, the use of SLT is the highest
among the poorest and among women. The suggested price and tax measures will help protect
this population from the health hazards of using jorda and gul.

Fifth, all tobacco products should have 15 percent VAT. The finance minister has indicated that
VAT Act 2012 would be implemented from the next fiscal year and its rate would be 5, 7 and 10
percent, which is commendable. However, considering the demerits and devastating public
health consequences, VAT on tobacco products should be retained at 15 percent. It can be done
within the purview of Article 58 of the law which allows for provision of “special schemes for
tobacco and alcoholic goods” for the National Board of Revenue (NBR) in setting the MRP and
VAT for all tobacco products including SLT.  

Sixth, a simple and effective tobacco tax policy should be formulated with an initial period of
five years, which will reduce tobacco use and increase government revenue.

Seventh, the finance minister has hinted at reducing corporate income tax. However, since
tobacco is recognised as a demerit and a “sin” industry with devastating impact on public health,
its corporate tax should not be decreased.

The proposed tax and price measures would encourage about 3.2 million adult smokers to quit
smoking; reduce the use of cigarettes from 14 to 12.5 percent and bidi from 5 to 3.4 percent; help
prevent the premature deaths of one million current smokers; and generate additional tax revenue
ranging from Tk 66.8 to Tk 119.8 billion. Additional revenue from these measures can be used to
offset the economic costs of tobacco use and finance public health as well as other
developmental priorities to achieve the SDGs and our overarching Vision 2041.
Proposed tobacco tax structure:
what could be achieved?
Bangladesh aspires to become a tobacco-free country by 2040. In order to achieve this goal, it is
important to explore the tobacco economy of Bangladesh, which comprises both demand for and
supply of tobacco products, tobacco taxation and the economic cost of tobacco use.

Of these, tobacco taxation plays key determining roles in reducing the demand for and supply of
tobacco products as well as in reducing economic cost of tobacco use. So, it is urgent to better
understand the existing tobacco structure of Bangladesh and its effectiveness.

And what is the importance of introducing new tobacco tax structure for Bangladesh? All queries
are answered from the recent study titled ‘Economics of tobacco and tobacco taxation in
Bangladesh’ conducted by Brac Institute of Governance and Development (BIGD) in close
collaboration with the University of Illinois at Chicago (UIC).

The sequence followed in this article allows us to discuss the prevailing tobacco tax structure of
Bangladesh, effectiveness of tobacco taxation and finally, the importance of introducing new
tobacco tax structure for Bangladesh.

Bangladesh has developed a complex multi-tier ad valorem excise tax (i.e., the amount of tax is
proportional to the price per unit of tobacco) for tobacco products.

Due to ad valorem nature of taxation, government gets only a portion of increased price and the
rest is enjoyed by the tobacco industry. This encourages tobacco industry to expand their
business and increase the risk to public health.

Such tax system results in large variations in tobacco tax bases and tax rates depending on the
type of tobacco products like cigarette, biri and smokeless tobacco (SLT), product characteristics
(i.e., filter or without filter) and cigarette brands (i.e., low, medium, high and premium).

Four tiers of market retail price (MRP) of cigarettes create wider gaps between tiers and create
opportunities for smokers to switch to low priced brand rather quitting. The government is also
deprived of revenue due to such behavioral change.
In Bangladesh the lowest tier of cigarette contributes only 31 percent of revenue though it
captures 53 percent of market share. This is due to disproportionately low tax base compared to
other tiers.

Biri and SLT products are extremely cheap and much affordable to the low-income class of
consumers and also relative to their growing per capita income. Informal manufacturing of SLT
products (zarda and gul) help to evade taxes at a large scale. Finally, tax base for cigarette, biri
and SLT are different and thus makes the system more complicated and unfair.

Availability of extremely cheap and affordable Cigarette brands compared to other neighboring
countries like India, Nepal, Sri Lanka, Thailand and Indonesia is also the resultant outcome of
the current cigarette tax system.

Therefore, cigarette users are not discouraged and this makes the demand side of tobacco
consumption worrisome and ineffective. Moreover, biri and SLT prices are relatively low, which
make these products more affordable to the low income-class of tobacco users. Last but not least,
lack of data on SLT products makes the enforcement of law and monitoring difficult and thus,
the loss of revenue for the government exchequer.

Findings from the supply side reveal that cigarette and raw tobacco product sales in Bangladesh
have increased in recent years. Moreover, prevalence of cigarette smoking is almost constant
despite the 1 percent population growth over the last one decade.

Therefore, recent increase in price through existing tax system work as an incentive for tobacco
growers as well as manufacturers to produce and supply more raw tobacco and tobacco products
respectively.

In addition, tobacco use is deadly and costly as it is treated as one of the major risk factors for
morbidity and mortality and it has severe economic consequences for the households with at
least one smoker.

For example, tobacco use in Bangladesh comprises 26 percent of deaths among men and 10
percent among women in 2016. The economic consequences of tobacco use arising from lost
productivity and healthcare costs amount to Tk 15,860 crore or 1.4 percent of GDP in
Bangladesh.
Therefore, it is very essential for Bangladesh to introduce new tobacco tax structure with a view
to reducing the demand for tobacco use effectively, the supply of tobacco products and the
economic cost of tobacco use.

The most effective way to reduce tobacco use is to raise the prices of tobacco products in such a
way that help lowering the affordability of the tobacco users. This would, in turn, encourage
current adult smokers to quit, effectively reduce the prevalence of smoking, reduce premature
deaths and generate additional tax revenue.

The proposed measures to tackle tobacco use have been done following the problems in the
existing tobacco prices and tax system.

A policy reform of gradual price increase and reducing the price tiers of cigarettes from four to
two and raising excise tax rates from 55 percent and 65 percent to 65 percent and 68 percent
respectively for the low and high tier over the next five years is expected to result in a significant
increase in excise tax revenue while reducing consumption at an impressive rate.

Such measures would help in reducing the price gaps between tobacco products and brands to
limit the ability of tobacco users to substitute between products. As an alternative avenue, this
study proposes specific taxes on cigarette as it is likely to generate more stable and predictable
revenue than existing ad valorem tax.

Moreover, specific excise taxes tend to be easier to administer and more effective in reducing
tobacco use and increasing tax revenue.

Moreover, introduction of a specific excise tax by the government of Bangladesh should be

regularly increased over time beyond inflation and income growth to ensure that the affordability
of tobacco products continues to decline.

In case of specific excise tax, no portion of this would be enjoyed by the tobacco industry.
Finally, harmonization of the tax base across the tobacco products is required. To control the
supply side, alternative livelihood measures for the tobacco growers could be introduced.

In addition, any kind of cash or in-kind incentives for the tobacco producers by the tobacco
industry should be stopped as all these work as cost advantages.
By rising prices through specific excise tax and lowering the tiers (or harmonisation of the tax
base) would help to prevent cigarette smoking initiation, promote cessation, lower consumption
among the continuing smokers, and reduce the death and disease and economic cost of smoking.

Finally, effective implementation of the proposed policies might help to bring the goal of
tobacco-free Bangladesh into reality.