The Financial Express

A time-fitting tax reform with tobacco

A time-fitting tax reform with tobacco

In Bangladesh, cigarette taxation presents an excellent case to strengthen the cause of a time-fitting reform in the tax system and also emphasises the need for better policy decisions in this sector. Despite sustained economic growth in recent years, Bangladesh is still struggling to ensure functional formal governance in its economy. The cause of an overhaul in the tax system often finds itself at odds with the interests of some influential quarters of the country. This leads to a persisting informality in tax system, a lack of motivation to digitalise, widespread discretionary power and conflicts of interest. With a dismal tax-to-GDP ratio of 11.16 per cent in FY 2019-20, there is no denying that the existing tax system keeps most of the country's economic resources untapped. Perhaps, this is more true in tobacco taxation than in any other sector.

As per World Health Organisation (WHO) Global Adult Tobacco Survey (GATS) of 2017, currently 35.3 per cent (37.8 million in number) of adults in Bangladesh use tobacco. When compared to the findings of 2009 Survey (43.3 per cent), this shows an 18 per cent relative reduction in prevalence of tobacco use. Tobacco use in Bangladesh consists mostly of single or dual use of cigarettes, biris and smokeless tobacco products (i.e. gul and zarda). What often gets lost in the comparison between GATS findings 2009 and 2017 is the fact that cigarette use did not see any reduction in these eight years. Delving deep into GATS results shows that the percentage of adult cigarette smokers in 2009 was 14.2 per cent. It remained almost the same at 14 per cent in 2017 GATS result. The total number of smokers has, in fact, gone up from 13.5 million to 15 million in this period. A serious question that arises is how cigarette use managed to remain the same despite increase in cigarette prices between 2009 and 2017.

This is where the structural deficiencies of cigarette taxation come in. The goals of tobacco taxation, as stated by WHO, are that it would discourage use, reduce the affordability of tobacco products and generate revenues for the government. Higher prices also discourage youth from initiating tobacco use. So, people will spend less on tobacco, have more money in their hands, enjoy healthier lives, have non-smoker children and all while the government will be earning more revenues. The outdated tax system and responsible authorities often fail to comprehend this easy win-win equation.

The existing cigarette tax system is a complex one with multi-tiered ad-valorem excise taxes. Large variations in tax rates occur depending on cigarette tiers (low, medium, high and premium priced brands). The multi-tiered tax system for cigarettes has resulted in cigarettes remaining cheap and affordable, smokers switching to cheaper cigarettes instead of quitting, stable cigarette sales per adult in recent years, and a relatively constant cigarette smoking prevalence in recent years.

Let us consider the example of the pre-pandemic budget for FY 2019-20. The FY 2019-20 budget increased the price of low-tier cigarettes by 20 paisa per stick (i.e. 5.7 per cent increase) whereas, at the same time, the per capita income has increased by 11.32 per cent. It should be noted that 72 per cent of all cigarette smokers are users of low-tier products. PROGGA, an anti-tobacco organisation, has recently conducted an affordability analysis of different tiers of cigarettes using Relative Income Price (RIP) method. It shows that in FY 2015-16, the purchase of 1000 sticks of medium, high and premium tier cigarettes required 4.15, 6.46 and 9.32 per cent of per capita GDP respectively. However, in FY 2017-18, the same number of cigarette sticks required only 3.27, 5.09 and 7.34 per cent of per capita GDP respectively. This suggests that the real price of cigarettes has fallen to a considerable extent over the years and the inefficient tobacco taxation has barely produced any output to reduce the number of cigarette smokers. Besides, the multi-tiered pricing of cigarettes allows users to switch to cheaper brands once price is increased and provides companies with abundant opportunity to evade taxes.

Bangladesh is currently the 8th largest cigarette market in the world which indicates the enormity of revenue potential from this sector once proper tax policy is introduced. It may seem puzzling how the National Board of Revenue (NBR) has managed to miss out on dual opportunities to increase revenue collection and protect public health. Tobacco companies often tend to portray tax increase as a death penalty to tax revenues from the industry. Such manipulated narrative of tobacco companies often finds its way into policymaking and result in policy decisions that are detrimental to public interest. One should also keep in mind that the government itself holds about 10 per cent share in an ultra-influential tobacco company, causing a grave conflict of interest in tobacco control. Conflicts of interests often tend to result in compromised decisions.

Bangladesh wants to become a tobacco-free country by 2041. Such deadline requires some bold decisions from our policymakers. The upcoming 2021-22 budget can be a beginning for better days in tobacco control. The additional revenue generated through time-fitting budgetary measures can also help the government tackle pandemic-induced pressures on the economy. The most desired and substantial tax reform in cigarette would be to abolish the tier distinctions altogether. However, current reality may not allow adopting such measure within a short period of time. In that case, the existing ad-valorem method can be replaced with a specific excise duty with uniform tax burden across all cigarette tiers. Supplementary duty and price gaps among tiers also pose a threat as they reduce the impact on tax and price hike. These gaps may be reduced to curb the scope for existing users to switch tiers. Since the low-tier users constitute about three-quarters of cigarette consumers in Bangladesh, this tier requires a radical tax increase move from the government. This is corroborated by a recent article in Tobacco Control (Ahmed, et al, 2021) that significant increases in cigarette prices at the lower end would effectively reduce cigarette consumption among the people having low expenditure, and at the same time enhance government revenue. Apart from the budgetary measures, the tax administration should also be modernised. The existing taxation system leaves the institution a little too much discretionary power. This often leads to little transparency, accountability and results in the erratic issuance of statutory regulatory orders (SROs), bypassing the national parliament. In 2018, with such an SRO, the apex tax authority offered about Tk 20 billion tax relief to BAT Bangladesh. There should be an end to such move that raises more questions than answers.

Tobacco taxation is a good starting point for a time-fitting tax reform in Bangladesh. The tobacco tax reform should aim at attaining the dual objectives of protecting public health and increasing government revenue.

Dr. Nasiruddin Ahmed is former chairman of National Board of Revenue.

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ABM Zubair is Executive Director at PROGGA (Knowledge for Progress).

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