Tobacco tax: Who really pays it?

Every annual budget, like all other consumers, tobacco users wait with bated breath to find out whether their precious pack or pouch will burn a bigger hole in their pocket. Those usually do, drawing cheers from anti-tobacco campaigners and groans from the incorrigible addicts. The government looks forward to adding more to its coffers, but tobacco companies hardly turn a hair, thanks to the complex taxation structure, which ensures that their own coffers won't bear the brunt either. It's a win-win situation for all but the consumer.
For centuries, governments around the world have heeded Adam Smith’s advice and imposed a variety of taxes on tobacco leaf and its products. They have used these taxes to pursue multiple goals—the primary among those being revenue generation.
Some governments levy high import duties on tobacco leaf and products to protect domestic farmers and manufacturers from foreign competitors. Others impose differential taxes on tobacco products, levying more on multinational companies’ products and less on local producers’.
Anti-tobacco campaigners across the world have always seen proper taxation as the most efficient way of curbing tobacco usage. Tobacco companies, on the other hand, are always prepared to cash in on all the loopholes in these complex tax structures as badly as possible. The situation in Bangladesh is no different.
 
Tiered structures
Bangladesh imposes a variety of taxes on tobacco products, including supplementary duties on cigarettes, bidis, chewing tobacco, and pipe tobacco, duties on imported tobacco products, and on both imported and exported tobacco leaf, and a Value Added Tax (VAT) on the retail prices of all tobacco products.
This budget, the government increased the supplementary duty (SD) on tobacco products. The SD, which is imposed as a percentage of the price, varies significantly across tobacco products and brands. Since the SD is applied uniquely to tobacco products, it is effectively called ‘excise tax’.
The government also raised the lowest price of cigarette from Tk 18 to Tk 23, and the supplementary duty rate from 48 per cent to 50 per cent. It did not increase the price of medium- and high-segment cigarettes—Tk 45 and above—and left the decision to fix prices on the manufacturer. However, it raised the SD of these two segments from 61 and 63 per cent to 62 and 64 per cent respectively.
Cigarette excise taxes in Bangladesh are ad valorem (‘according to value’) taxes, with the current rate varying from 50 to 64 per cent, based on maximum retail price. More expensive cigarettes are taxed at higher rates. Tobacco products also carry a VAT of 15 per cent on retail prices.
The price slabs that define the tiered tax structure are not continuous. No brand product is supposed to be priced below the minimum price, while the products in a certain price slab are taxed at the rate fixed for that slab.
Anti-tobacco campaigners of the country have long been saying that this tiered tax structure requires a strong tax administration, given that it creates incentives for tax avoidance and tax evasion.
 
The hidden truth
Eminent economist Prof Dr Abul Barkat said that faulty taxation has actually reduced tobacco prices in Bangladesh “steadily” since 2001, encouraging new users. “The real prices of tobacco have, indeed, fallen because the different taxes were levied on different price slabs, and were never based on inflation,” he said.
He explained that the relationship between prices, income, and cigarette consumption in Bangladesh becomes clearer when one considers the affordability of cigarettes, measured by the ratio of the average price of cigarette packs to per capita income.
From 1997 to 2002, cigarettes gradually became less affordable in Bangladesh as real incomes fell. This led to a decline in per capita cigarette consumption during this period. But cigarettes became more affordable after 2002, when incomes rose rapidly. So, there was a rise in per capita consumption from 2003 to 2010.
He added that the tiered ad valorem tax structure in Bangladesh results in significant price gaps between branded products in different price categories, with low-priced products selling for less than one-fifth of what the premium brand products sell for, and less than half of what products in the second-lowest price tier cost.
“The availability of quite inexpensive cigarettes and the large price gaps between the tiers give smokers a considerable opportunity to switch to cheaper brands in response to tax and price increases,” he pointed out.
A study by the International Tobacco Control Policy Evaluation Project (ITC Project), released in May, found that the prices of cigarettes and smokeless tobacco did increase between 2009 and 2015, but rapid economic growth in Bangladesh “more than offset these increases”.
Bangladesh is one the leading tobacco-producing nations and the prices of tobacco here are among the lowest in the world, the study said, adding that this calls for a reform in the tobacco tax system as “tobacco users may switch between tobacco products rather than quit”.
 
Why taxation doesn’t help
Almost every year, the prices of tobacco and tobacco products increase in Bangladesh as the National Board of Revenue (NBR) raises the taxes. But that increase does not actually hurt the tobacco companies and the consumers end up bearing the burden.
Dr Barkat said since the tax rate is based on price slabs, and since the rate rises with the price, the tax structure exacerbates some of the consequences of an ad valorem tax. With ad valorem excise duty, the tax per unit rises with prices, so that the tax and the revenues it generates are more likely to keep pace with inflation. On the other hand, in the case of specific taxes, the real value of the tax and the resulting revenues will fall with inflation unless they are regularly raised, he explained.
“Specific taxes do not have this advantage, requiring regular increases to keep pace with inflation. The infrequent and small increases in the ad valorem tax rates, coupled with modest increases in the price ranges for the price slabs, have led to declining real cigarette prices in Bangladesh,” he added.
Some countries have addressed the problem of inflation eroding the value of a specific tobacco tax by creating mechanisms for annual or other adjustments to specific tax rates that maintain the real value of the tax over time, said Dr Barkat.
“We can also do the same. Instead of having a complex tiered structure, taxing all cigarette brands at a specific rate of Tk 34 per pack (70 per cent of retail price) would increase excise revenues by about Tk 15.1 billion (USD 200 million). “Adopting a uniform cigarette tax, accounting for 70 per cent of average cigarette prices, would also reduce the rate of smoking by over 46 per cent—almost 7 million adult cigarette smokers,” he claimed.

Tobacco use in Bangladesh

• Bangladesh is one of the largest tobacco-consuming countries in the world, with over 46 million (43%) adults consuming
cigarettes, bidis, smokeless tobacco, or other tobacco
products.

• 58% men and 29% women
consume tobacco in some form.

• The use of smokeless tobacco is common among both women and men; 28% women and 26% men use smokeless tobacco.

• Tobacco use among teenagers is a cause for concern in Bangladesh; nearly 7% of 13- to 15-year-olds use tobacco
products.

Tobacco tax: Who really pays it?

Every annual budget, like all other consumers, tobacco users wait with bated breath to find out whether their precious pack or pouch will burn a bigger hole in their pocket. Those usually do, drawing cheers from anti-tobacco campaigners and groans from the incorrigible addicts. The government looks forward to adding more to its coffers, but tobacco companies hardly turn a hair, thanks to the complex taxation structure, which ensures that their own coffers wont bear the brunt either. Its a win-win situation for all but the consumer. For centuries, governments around the world have heeded Adam Smiths advice and imposed a variety of taxes on tobacco leaf and its products. They have used these taxes to pursue multiple goalsthe primary among those being revenue generation. Some governments levy high import duties on tobacco leaf and products to protect domestic farmers and manufacturers from foreign competitors. Others impose differential taxes on tobacco products, levying more on multinational companies products and less on local producers. Anti-tobacco campaigners across the world have always seen proper taxation as the most efficient way of curbing tobacco usage. Tobacco companies, on the other hand, are always prepared to cash in on all the loopholes in these complex tax structures as badly as possible. The situation in Bangladesh is no different. Tiered structures Bangladesh imposes a variety of taxes on tobacco products, including supplementary duties on cigarettes, bidis, chewing tobacco, and pipe tobacco, duties on imported tobacco products, and on both imported and exported tobacco leaf, and a Value Added Tax (VAT) on the retail prices of all tobacco products. This budget, the government increased the supplementary duty (SD) on tobacco products. The SD, which is imposed as a percentage of the price, varies significantly across tobacco products and brands. Since the SD is applied uniquely to tobacco products, it is effectively called excise tax. The government also raised the lowest price of cigarette from Tk 18 to Tk 23, and the supplementary duty rate from 48 per cent to 50 per cent. It did not increase the price of medium- and high-segment cigarettesTk 45 and aboveand left the decision to fix prices on the manufacturer. However, it raised the SD of these two segments from 61 and 63 per cent to 62 and 64 per cent respectively. Cigarette excise taxes in Bangladesh are ad valorem (according to value) taxes, with the current rate varying from 50 to 64 per cent, based on maximum retail price. More expensive cigarettes are taxed at higher rates. Tobacco products also carry a VAT of 15 per cent on retail prices. The price slabs that define the tiered tax structure are not continuous. No brand product is supposed to be priced below the minimum price, while the products in a certain price slab are taxed at the rate fixed for that slab. Anti-tobacco campaigners of the country have long been saying that this tiered tax structure requires a strong tax administration, given that it creates incentives for tax avoidance and tax evasion. The hidden truth Eminent economist Prof Dr Abul Barkat said that faulty taxation has actually reduced tobacco prices in Bangladesh steadily since 2001, encouraging new users. The real prices of tobacco have, indeed, fallen because the different taxes were levied on different price slabs, and were never based on inflation, he said. He explained that the relationship between prices, income, and cigarette consumption in Bangladesh becomes clearer when one considers the affordability of cigarettes, measured by the ratio of the average price of cigarette packs to per capita income. From 1997 to 2002, cigarettes gradually became less affordable in Bangladesh as real incomes fell. This led to a decline in per capita cigarette consumption during this period. But cigarettes became more affordable after 2002, when incomes rose rapidly. So, there was a rise in per capita consumption from 2003 to 2010. He added that the tiered ad valorem tax structure in Bangladesh results in significant price gaps between branded products in different price categories, with low-priced products selling for less than one-fifth of what the premium brand products sell for, and less than half of what products in the second-lowest price tier cost. The availability of quite inexpensive cigarettes and the large price gaps between the tiers give smokers a considerable opportunity to switch to cheaper brands in response to tax and price increases, he pointed out. A study by the International Tobacco Control Policy Evaluation Project (ITC Project), released in May, found that the prices of cigarettes and smokeless tobacco did increase between 2009 and 2015, but rapid economic growth in Bangladesh more than offset these increases. Bangladesh is one the leading tobacco-producing nations and the prices of tobacco here are among the lowest in the world, the study said, adding that this calls for a reform in the tobacco tax system as tobacco users may switch between tobacco products rather than quit. Why taxation doesnt help Almost every year, the prices of tobacco and tobacco products increase in Bangladesh as the National Board of Revenue (NBR) raises the taxes. But that increase does not actually hurt the tobacco companies and the consumers end up bearing the burden. Dr Barkat said since the tax rate is based on price slabs, and since the rate rises with the price, the tax structure exacerbates some of the consequences of an ad valorem tax. With ad valorem excise duty, the tax per unit rises with prices, so that the tax and the revenues it generates are more likely to keep pace with inflation. On the other hand, in the case of specific taxes, the real value of the tax and the resulting revenues will fall with inflation unless they are regularly raised, he explained. Specific taxes do not have this advantage, requiring regular increases to keep pace with inflation. The infrequent and small increases in the ad valorem tax rates, coupled with modest increases in the price ranges for the price slabs, have led to declining real cigarette prices in Bangladesh, he added. Some countries have addressed the problem of inflation eroding the value of a specific tobacco tax by creating mechanisms for annual or other adjustments to specific tax rates that maintain the real value of the tax over time, said Dr Barkat. We can also do the same. Instead of having a complex tiered structure, taxing all cigarette brands at a specific rate of Tk 34 per pack (70 per cent of retail price) would increase excise revenues by about Tk 15.1 billion (USD 200 million). Adopting a uniform cigarette tax, accounting for 70 per cent of average cigarette prices, would also reduce the rate of smoking by over 46 per centalmost 7 million adult cigarette smokers, he claimed. Tobacco use in Bangladesh Bangladesh is one of the largest tobacco-consuming countries in the world, with over 46 million (43%) adults consuming cigarettes, bidis, smokeless tobacco, or other tobacco products. 58% men and 29% women consume tobacco in some form. The use of smokeless tobacco is common among both women and men; 28% women and 26% men use smokeless tobacco. Tobacco use among teenagers is a cause for concern in Bangladesh; nearly 7% of 13- to 15-year-olds use tobacco products.