Who benefits from the rigged tobacco tax structure in Bangladesh?

At the South Asian Speakers' Summit on 31 January 2016, Prime Minister Sheikh Hasina pledged to make Bangladesh tobacco-free by the end of 2040. She assured that the country would comply with the World Health Organisation's Framework Convention on Tobacco Control (WHO FCTC).  

According to WHO, in low-and-middle-income countries, an estimated 1.04 billion people use tobacco-related products, which is a leading cause of preventable deaths worldwide. It also contributes to poverty in low-income households by diverting household expenditure away from basic necessities.

The latest Global Adult Tobacco Survey (GATS) report on Bangladesh revealed statistics imperative to the discussion on tobacco taxation. There are many different tobacco products in the market, but we will primarily focus on cigarettes here. 

According to the report, Bangladesh, a lower-middle income country, is one of the highest tobacco consuming countries in the world where around 7% of youths aged between 13 and 15 years and 35% of adults consume tobacco. 

The average monthly expenditure of cigarette consumption stands at a whopping Tk1077.7 ($10.2) in a country where 20.5% of the population still lives below the poverty line. 

However, Bangladesh must be applauded for the implementation of several tobacco control measures, notably mass health education awareness programmes, advertising and promotion bans, explicit health warnings, policies on taxation, restrictions on smoking in public places, the formation of National Tobacco Control Cell (NTCC) and the imposition of the Health Development Surcharge (HDS). 

The country has made significant progress in reducing tobacco consumption, but there remains a considerable number of challenges in reaching the desired level. 

Problem in the status quo

A proven technique to reduce cigarette consumption - a popular tobacco product-is to raise prices. However, studies conducted by economists reveal that only raising prices is not helping because the current ad valorem tax structure in Bangladesh is rigged against the interest of the people and favours the corporates. 

For instance, when the regulatory authority raises the price of a cigarette by Tk10, provided the Total Tax Incidence (TTI) remains the same at an arbitrary 70%, the government receives an additional Tk7 while the company gets an untaxed Tk3. 

In Bangladesh, when price increases, it shifts consumer interest towards lower-tier cigarettes with lower prices and lesser taxes as a supplementary duty. Due to this permeable price tiering strategy, the volume of sales in the lower tier increases but tax collection does not rise proportionally.

This ineffective taxation system allows the composition of the consumption to change across the tiers, keeping the overall tobacco consumption largely undeterred. Due to the shift in consumer behaviour, tobacco companies reap profits while posing a significant risk to public health. 

Mixed signals on government's stance against tobacco

The regulators must reassess how they evaluate the tax revenue generated by the tobacco companies. This revenue stream is simply a cost-mitigating mechanism for our public health expenditures, which sets it apart from other revenue sources from other sectors. 

Thus the notion of granting social recognition to tobacco companies and tobacco moguls for being the 'highest taxpayers' in the country, and tobacco companies enjoying the same corporate tax rate as essential telecom sectors demand scrutiny and assessment of rationality. 

Despite the Prime Minister's commitment to paving a roadmap for a tobacco-free Bangladesh, the government's significant market share, through different entities, in a company that has recently enjoyed a decline in its effective tax rate, raises serious concern. Instead of divesting from such shares, the government's ownership and close association with these companies indicate a clear conflict of interest.

The policy structure creates an atmosphere of ambiguity and sends mixed signals to society. Promises will not translate into much if our commitment to curbing tobacco use isn't coherently reflected in all policy spaces.

Why now?

Developed countries have succeeded in reducing cigarette consumption by actively pursuing a strict taxation policy befitting the threat it poses to public health. As the market is shrinking in the developed world, century-old tobacco corporations seek greater market penetration in countries with relatively weaker tobacco control policies and Bangladesh cannot fall prey to such a nefarious business strategy.  

Recommendations by experts

Economists and the World Health Organisation's Framework Convention on Tobacco Control (WHO FCTC) guidelines support the implementation of specific taxes on tobacco products, such as excise taxes. 

Civil society- local non-profits, think tanks and academia- has actively voiced concern regarding the current tax structure and strongly supports the transition from the complex ad valorem multi-tiered tax structure to a more direct and effective single-tiered specific excise tax. 

Centre for Policy Dialogue (CPD), in its last Independent Review of Bangladesh's Development (IRBD), has also recommended the NBR eliminate the tier system and impose a specific tax of Tk10 as supplementary duty (SD) per stick of cigarette instead of the existing Tk9.23, Tk7.21, Tk4.22 and Tk2.28 for premium, high, medium, and low tiers respectively. 

There is ample country-specific empirical evidence that imposing specific taxes has proven effective in reducing both tobacco consumption and increasing government revenue by almost multiple folds, such as the specific tax structure in South Africa and the 'Sin Tax Reform Act 2012' implemented in the Philippines. 

Therefore, the policymakers must understand that the current tax structure must be changed to make the vision of a tobacco-free Bangladesh by 2040 come true. Only infrequent price increases under the ad valorem tax structure shift consumers from one tier to the lower tier but don't have a substantial net decline in consumption. 

Implementing a specific tax structure for tobacco products, especially cigarettes, will surely be a step in the right direction. The additional government revenue generated through specific taxation could then be mobilised to the ailing public healthcare sector. 

By prioritising public health over any short-term interest, the government must align all policy domains with curbing tobacco use through the implementation of a specific tax structure and pave the way towards a tobacco-free, healthier  Bangladesh.

Mohammad Abu Tayeb Taki is a student of economics with an immense interest in understanding the world around him. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.