When tobacco taxes are being raised progressively in most countries, Japan wants Bangladesh to keep the taxes lower so that Japan Tobacco International stays competitive here.
In a letter to Finance Minister AHM Mustafa Kamal last month, Japanese Ambassador to Bangladesh ITO Naoki expressed his discontent at increased taxes imposed on tobacco by the National Board of Revenue (NBR) in the fiscal 2019-20 and the commerce ministry's turning down of Japan Tobacco's request for permission to import cigarettes.
"The tax rise was a diversion from the 'usual pattern' adopted for years and significantly hit JTI [Japan Tobacco International] due to their reliance on the medium segment of the market," reads the letter.
Japan Tobacco International, one of the five largest tobacco companies in the world, completed its $1.47 billion acquisition of Akij Group's tobacco business in November 2018 – in what was the biggest ever single foreign direct investment in Bangladesh.
Since then, the company has been striving to expand its share of the market through bolstering its position in the low and medium segments and by importing premium cigarettes.
The letter sent by the Japanese Embassy notes that Japan Tobacco faced "undue" demands by one of the local government bodies over the issue of a trade licence. It took more than a year until a cabinet secretary intervened and solved the problem.
Bangladesh is the eighth largest market for tobacco globally. To bring down its consumption, tax is imposed and policies are put in place to discourage tobacco cultivation and marketing.
The government raised the prices of cigarettes in all four segments – low, medium, high and premium – in FY2019-20. The retail price of every 10 sticks in the low segment increased from Tk32 to Tk37, in the medium segment from Tk48 to Tk63, in the high tier from Tk75 to Tk93, and for premium cigarettes from Tk101 to Tk123.
Taxes on tobacco products, including cigarettes, are hiked every year because such products are harmful for health, and taxes apply to all companies, said Md Masud Sadiq, a board member of the NBR.
Tobacco taxes comparison
Taxation no longer favours tobacco-makers in most countries, be it Japan or Austria where Japan Tobacco has operations.
In line with the global agenda, Bangladesh's tobacco policy aims at gradually raising taxes to discourage smokers and becoming tobacco-free by 2040.
Anti-tobacco campaigners find tobacco tax in Bangladesh is still lower compared to many other countries.
Japan is well ahead of Bangladesh in taxing tobacco products.
In 2010, Japan's government raised cigarette taxes by 40% at one go, the biggest ever tax increase on tobacco products, which caused prices of most popular brands to go from $3.60 to $4.90 (from 300 yen to 410 yen).
These cheaper segments of cigarettes saw their latest tax hike in Japan in October 2020.
On its own website, Japan Tobacco says some 77% of the retail price of its cigarettes goes directly to the state.
In Austria, where a multiyear taxation system keeps on increasing tax every year, the Japanese tobacco giant faces a fixed tobacco tax rate of €63 per 1,000 units and a variable (ad valorem) tax rate of 36% of the retail sales price. A 20-stick packet costs €5.50, and tobacco tax is €3.24.
In addition to excise taxes, tobacco products in Japan face consumption taxes, local excise taxes, and tobacco special taxes which make tax burdens much bigger than that in Bangladesh.
According to the World Health Organisation, cigarettes are a lot cheaper in Bangladesh than in Japan.
The retail price of Japan's most sold brand is $4.45 per 20 cigarettes, while it is $2.53 in Bangladesh.
Tax comprises about 63% of cigarette prices in Japan while it is more than 70% for low-tier cigarettes in Bangladesh and over 80% for the other three segments.
According to experts, cigarettes are cheaper in Bangladesh, despite high taxes, because tobacco is cheap here, resulting in low production costs of cigarettes.
On the ministry's refusal to permit cigarette import, the Japanese ambassador said, "This is a 'policy dichotomy' as the import tax structure is very much existent in Bangladesh for tobacco products."
In November 2020, Japan Tobacco was looking to expand products in the low segment by introducing flavoured capsule-inserted cigarettes, but the NBR prevented it through an "exceptional" move to stop the marketing of such products below the medium segment, according to the letter.
The NBR effectively barred Japan Tobacco's new launches, while protecting competitors, it says.
"The move depicted a harsh or unreasonable stance towards JTI," said Ito Naoki, when there was no evidence of market downtrading for a product like this in Bangladesh or anywhere else.
However, Masud Sadiq of the NBR said flavoured cigarettes – not flavoured capsule cigarettes – had existed in the low segment of the market even before Japan Tobacco's move to bring out new products.
There were flavoured capsule cigarettes in the premium segment only, which was why the NBR stopped the marketing of such a variety below the medium segment, he added.
Cigarette consumption in Bangladesh exceeded 94 billion units in 2018 and has been growing by about 2% year-on-year.
British American Tobacco is the biggest player in the market, with its brands accounting for 78% of the market.
Making an indirect reference to British American Tobacco, the letter says Japan Tobacco management staff are being harassed with criminal legal charges by the competitor on "flimsy notions".
"These kinds of practices are not common in the international tobacco markets."
Ito Naoki, in his letter, said Japanese investors were intently watching the actions of the Bangladesh government and further investments from Japan would depend on the success of Japan Tobacco.
"Taking care of existing investors is the best route to bring in new investment in the country from the view of fairness of competitiveness," the letter says.
The challenges facing Japan Tobacco might not look well when it comes to ease of doing business in Bangladesh, the ambassador said.
Copies of the letter were sent to the National Board of Revenue, the commerce ministry, the Prime Minister's Office, and the Bangladesh Investment Development Authority (Bida).
Responding to queries about the letter, Bida's Executive Chairman Md Sirazul Islam said, "Different businesses come across different challenges. But the Japanese ambassador brought complaints against the NBR and some other government bodies. We will look into those. If the organisations have anything to do about the matter, we will request them to do so."
Japan's aggregated direct investment in Bangladesh had only been $3 billion since Bangladesh's independence in 1971, though it has invested highly in many other countries every year, he said.
ABM Zubair, executive director of the anti-tobacco campaigner PROGGA, said the Japanese ambassador had violated the WHO Framework Convention on Tobacco Control that both Bangladesh and Japan were signatories to.
As the Convention goes, parties shall act to protect public health policies with respect to tobacco control from commercial and other vested interests of the tobacco industry. And all parts of government, including diplomatic missions, are obligated to implement this objective.
When The Business Standard reached out to the Japanese ambassador through email, he said the letter was intended to draw the attention of the authorities to "ensure fair, transparent and accountable treatment" of the industry players.
Tobacco industry is currently not illegal and contributes to the national revenue, Ito Naoki said. "Free and fair competition must be ensured to all industries in accordance with the law."