Tobacco lures in smokers despite high duty: Cracks in taxation are to blame

Every year, the government hikes the tax on tobacco, an item cheaply available for its low cost of production here. The foremost objective is to discourage consumption by turning it into a pricey item, but when taxation is flawed, the government is far from reaching the goal.

Examples of the four-tier cigarettes – low, medium, high and premium – offer an explanation as to why taxation fails to push up prices to a level that prompts smokers to quit smoking.

Under the low tier, 10 sticks of cigarettes were priced at a minimum of Tk39 last year, inclusive of all taxes. Taxes account for 73% of the price, meaning the government gains Tk28.47 for the sale of 10 sticks. The company gets the remaining amount – Tk10.53 – as the cost of production plus profit.

Similarly, the minimum costs for medium, high and premium cigarettes are Tk63, Tk97 and Tk128 per 10 sticks, with 81% of the prices going to the government as tax revenue.

This indicates how cheap tobacco is in Bangladesh, which is why the seemingly high tax rates, which are imposed on the basis of products' value, do not raise prices to a great extent. 

Prof Rumana Huque, convenor of the Bangladesh Network for Tobacco Tax Policy, a think-tank on tobacco taxation, said the cultivation of tobacco is cheap here due to cheap labour. 

The inexpensive raw materials led to lower retail prices of cigarettes and biri, compared to those in most other countries. 

The World Health Organisation's Framework Convention on Tobacco Control says price and tax measures are an effective means of discouraging tobacco consumption.

Effective taxation

To transform taxation into a useful tool to bring down tobacco consumption, experts recommend a high specific excise tax, which would be levied on a fixed quantity of goods, for every 20 cigarettes, for example. 

Since specific excise tax does not rely on the product's value, it does not encourage consumers to switch to cheaper options in the wake of escalating costs, as one might do moving to low-tier cigarettes from a high-tier brand to bear less tax burden in the case of existing ad-valorem tax [tax based on value].

Experts, however, say no rationality is there to segment tobacco products into several categories because quality is only associated with packaging, colour and other aspects to lure consumers, with no difference in the impact on health. 

In the South Asian region, Bangladesh has the second lowest retail price after Pakistan per 20 cigarette sticks of the most-sold brand, expressed in purchasing power parity, while Sri Lanka has the highest. 

One of the reasons is that the price, excluding tax, is high in Sri Lanka, almost nine times that of Bangladesh, according to the World Bank. The other reason is specific excise tax. 

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), said the cost of production must be higher in Sri Lanka than in Bangladesh because of cheap and informal labour here. 

In Sri Lanka, the tax share of price is 62.15%, lower than that of Bangladesh. 

There are countries such as Indonesia and Thailand that have adopted a mix of specific and ad-valorem tax to combat the scourge of tobacco. 

According to WHO, the average retail cigarette price is much higher in countries leaning towards specific excise and the market share of lower-priced cigarettes falls when specific excises increase. 

The specific tax, however, has to be revised from time to time, adjusting to inflation. 

On the other hand, tax based on a product's value can instigate an increase in production because it causes the price to fall with tax to be paid to drop as well. As a result, the consumption goes up but the government earns less revenue.

The Philippines is one of the nations that have been successful in fighting against tobacco. It increased specific excise taxes for all brands in 2012 to a unitary specific excise tax five years later. By 2017, the average price per pack more than doubled. Though it caused the sales of tobacco to drop, government revenue from tobacco taxes more than tripled. 

Bangladesh is one of the largest tobacco consuming countries, with 37.8 million adults – 35.3% of the population – using tobacco in 2017, down from 43.3% in 2009, according to Global Adult Tobacco Survey (GATS) Bangladesh.

The number of cigarette smokers decreased slightly from 14.2% to 14% in the eight years to 2017, whereas the overall number of smokers of cigarettes and biri went down from 23% to 18%. 

The decrease in smoking is thus attributed to biri becoming unpopular over time. Smokeless tobacco consumption also went down from 27.2% to 20.6% during the period.

Substitution of products

A 2019 study by Brac Institute of Governance and Development (BIGD) says that apart from the high tax, biri consumers switching to low-cost cigarettes might be a reason for biri consumption going down. 

Product substitution largely happens from medium tier to low tier cigarettes than between the upper slabs of cigarettes or between the different categories of biri – with and without filter.

The BIGD found that the market share of low-tier cigarettes increased from about 25% in fiscal year 2006-07 to 71% in fiscal year 2017-18. Around the same period, the market share of the medium tier declined from about 53% to 16%.

To avert substitution, four tiers should be cut down to two tiers – combining low and medium into one slab and high and premium into another – because that will not leave consumers with many alternatives, according to anti-tobacco campaigners and experts.

Smoked and smokeless tobacco consumption is more prevalent in rural settings, as GATS suggested, and smokers also tend to switch to cheaper brands in response to increased tax. 

Nasiruddin Ahmed, former chairman of the National Board of Revenue, said the price gaps have to be narrowed too within the slabs of cigarettes and between cigarettes and biris in order to discourage smoking.