Smart tobacco taxes can generate an extra Tk6,000cr in revenues
Countries like Gambia and Pakistan have benefited significantly from such modelling-based tobacco taxes
Bangladesh's economy is currently under significant stress due to a critically low foreign exchange reserve, ramping inflation and unimpressive internal revenue growth.
Consequently, we anticipated some concrete proposals to address those challenges. However, the FY2024-25 budget fell short of expectations.
Despite the government's intention to create a smart economy, the tax system remains far from innovative. This year's tax proposals, like those before, lacked significant public welfare considerations.
For example, mandatory tax returns for renting community centres for events and the option to legalise undisclosed income at a lower tax rate than regular income have sparked widespread criticism. Additionally, the plan to borrow from internal sources has alarmed the business community.
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A well-informed and smart tax system could have mitigated much of this criticism and concern. This article explores how an evidence-based and modelling-based tobacco tax could have increased the government's revenue by an additional Tk6,000 crore over the current proposal.
This year, proposed price increases for 10-pack cigarettes in four tiers (low, middle, high and premium) are Tk5, Tk3, Tk7 and Tk10 respectively. Given last year's nearly 10% inflation rate, the increase in low-tier cigarette prices is effectively just Tk1, or 10 paisa per stick, which is inadequate.
Adjusted for inflation, the prices of cigarettes in other tiers have witnessed a decrease resulting in increased affordability and thus potentially benefiting manufacturers. However, rationally increasing these prices would benefit both government revenue and public health.
The National Board of Revenue (NBR) sets these prices and taxes through discussions with stakeholders, including cigarette companies, which is not scientifically sound. Cigarette companies have no reason to want a decrease in cigarette usage.
On the other hand, the government is reluctant to take risks due to substantial revenue earned from this sector. However, if these prices were determined through evidence-based and modelling-based approaches, it would benefit both the government and public health.
While many countries lack such modelling frameworks, world-renowned researchers have created a model suitable for Bangladesh available at Johns Hopkins University's Tobacconomics centre. This model considers Bangladesh's current tax system, demand patterns, per capita income growth and inflation, using data from surveys published in reputable journals like the British Medical Journal's Tobacco Control.
According to this model, the prices for 10-stick cigarettes should be set at Tk60, Tk80, Tk130 and Tk170 for the low, middle, high and premium tiers, respectively. This accounts for demand, supply, smoker behaviour patterns and inflation. The aim is to determine cigarette prices that reduce tobacco use and increase revenue.
Countries like Gambia and Pakistan have benefited significantly from such modelling-based tobacco taxes by increasing the government revenue significantly within a very short time.
If the government adopts the proposed tobacco tax as stated in the budget proposal, annual revenue could reach approximately Tk41,000 crore – 12% more than the previous fiscal year.
However, with a modelling-based tobacco tax, the government could earn about Tk47,500 crore, almost 30% more than the projected revenue for this year, translating to an additional Tk10,000 crore.
Failing to adopt this proposal means losing over Tk6,000 crore in potential revenue, which could replace controversial tax measures like mandatory income tax returns for social events and legalising undisclosed income at a 15% tax rate. During times when funding is crucial for development projects, healthcare, education and infrastructure, ignoring this potential revenue is unwise.
While the financial benefits of modelling-based taxes are clear, their impact on public health makes the case even stronger. The current budget proposal is expected to reduce cigarette use by only 0.53% points. In contrast, a modelling-based tax could reduce cigarette use by at least 1.25% points, potentially preventing 540,656 youth deaths and 1,078,624 total deaths.
Smoking is a major cause of heart disease, cancer, diabetes and other ailments. A 2018 study showed that smoking costs the healthcare sector an additional Tk30,000 crore annually. Therefore, discouraging smoking through price increases would significantly reduce healthcare expenses.
Critics may argue that higher cigarette prices disproportionately impact low-income smokers. However, considering the public health benefits and using the additional revenue for public health initiatives and smoking cessation programmes would result in long-term improvements in public health and economic growth.
Moreover, in a country where the prices of essentials like electricity and gas are rising unchecked and where there are no effective government measures to curb these increases, not raising cigarette prices seems to benefit cigarette companies more than the poor.
Failing to adopt modelling-based tobacco taxes means missing out on significant additional revenue and stands in conflict with the Prime Minister's commitment to make the country tobacco-free by 2040.
Dr Shafiun Nahin Shimul is a professor at the Institute of Health Economics, University of Dhaka. He can be reached at [email protected]
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard
