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Budget 2021-22: Benefits of increasing the cost of tobacco use

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The Bangladesh economy has been massively hit by the second wave of the Covid-19. On the top of this predicament, high use of tobacco has been creating additional risks to public health given the already existing fragility of the health sector. The World Health Organisation (WHO) has called for discouraging tobacco use to decrease the risk of spreading the pandemic since smokers are more likely to be seriously ill with Covid-19 than non-smokers. Tobacco use also increases the risk of various fatal non-communicable diseases such as heart disease, cancer and diabetes, which also increase risk of Covid-19. Thus, considering WHO's warnings, about 40 million tobacco users in the country are now at serious risk of being infected by Covid-19. Therefore, in order to reduce the general and Covid-19 related health hazards, there is no alternative to reducing tobacco use.  

The statistics on the fatality of tobacco use is terrifying. As many as nearly 0.127 million people die untimely in the country every year due to tobacco related diseases. The research report titled "Economic Cost of Tobacco Use in Bangladesh: A Health Cost Approach", published in 2019, demonstrates that the economic loss of tobacco use (loss of medical expenses and productivity) in the fiscal year 2016-17 was Tk.305.6 billion, while the government earned merely Tk.226.10 billion from the tobacco companies in the same year. Thus, economic cost is significantly higher than the government's revenue. Nevertheless, whatever the amount of the revenue is, tobacco use cannot be legitimised because of its massive and deadly consequences, which include termination of human life, deadly diseases and risk of Covid-19.

 One of the most effective ways to reduce tobacco use is to increase its price via the 'law of demand'. However, if the price increases, there is a fear of the government to lose revenue because this industry is the single biggest payer to the public exchequer. Since tobacco products are comparatively price-inelastic, increasing price would not reduce consumption and revenue in a big way. For example, the actual price of cigarettes increased from 32 to 52 per cent between 1993 and 2009 in South Africa, resulting in a reduction in the number of cigarettes per capita per day, from four to two among adults, and a nine-fold increase in government revenue. 

Therefore, there is a need for undertaking both price and tax measures that can help reduce tobacco consumption and at the same time increase government revenue. But unfortunately, the price measures taken by the government has been meagre, which could not effectively reduce the number of users in a considerable manner. According to the Global Adult Tobacco Survey (GATS) 2016, the number of cigarette users in 2016 has increased by about 1.5 million compared to 2009. Also, the government has not been able to tap the potential of increasing revenue through effective reform in taxation.

The current tobacco tax structure in Bangladesh is very complex, which is not enough to discourage tobacco companies to continue business. Rather, they find it a lucrative market for business expansion and derive enormous profit. 

In Bangladesh, supplementary duty is levied at ad valorem basis on all tobacco products. There is also a wide range of base prices and tax rates depending on the type of tobacco product (cigarette, bidi, jarda and gul), types (filter, non-filter) and brand (4 price levels in cigarettes., viz. low, medium, high and premium). Taxes and price measures do not work properly to reduce tobacco use as there are opportunities to buy tobacco products at multiple price tiers and at different prices. If the price of tobacco products rises to a certain level due to tax evasion or if there is a change in the lifestyle of the consumer, s/he can move his/her choice to a convenient type.

Cigarettes are very cheap and readily available in the market due to multi-layered ad valorem tax structure. As a result, users are able to choose relatively cheap cigarettes instead of quitting smoking.

Bidis and smokeless tobacco products (jarda and gul) remain readily available as the tax base and tax rates are very low. In addition, most of them have been left out of the government's tax net due to illegal or unregulated production and marketing of cheap tobacco products, especially gul, jarda, tobacco leaves and bidi. Today, more than half of tobacco users (most of them poor and women) use smokeless tobacco. Thus, women and the poor are at risk of deadly diseases and Covid-19. The government is also losing a considerable amount of revenue.

Increase in the price of tobacco products is not consistent with the increase in the annual per capita income and inflation. The per capita national GDP (nominal) between 2016 and 2020 increased by 12.9 per cent per year. However, in the outgoing fiscal year's budget, the price of low-brand cigarettes, which occupy about 72 per cent of the cigarette market, has increased by only about five per cent. As a result, there will be no positive change in the smoking trend among the low-income people and the young generation who are the main consumers of cigarettes.

The supplementary duty on cigarettes has not been increased for the last few years. Therefore, multinational tobacco companies are making enormous profits, especially at high and premium brands (more than one-third of cigarette revenue comes from these two levels). If the price of cigarettes is increased without raising the supplementary duty, a large part of the increased price benefits tobacco companies.

Till today, even after the instructions of the Hon'ble Prime Minister Sheikh Hasina five years ago, there is no simple and strong tobacco tax policy in Bangladesh. As there is no specific policy or direction of the government in collecting revenue from the tobacco sector, the National Board of Revenue meets with the tobacco companies every year that influence prices and tax.

Given this context, there should some effective price and tax measures in the upcoming 2021-22 budget. 

n Introduce specific excise (supplementary) duty on all cigarette brands, bidis and smokeless tobacco products

n Reduce the price and tax gap between cigarette brands and reduce the price tier from 4 to 2 in the medium term (2021-22 to 2025-26).

n Abolish the existing divisions in tobacco products (price level of cigarettes, filter/non-filter bidis, separate retail prices of jarda and gul, etc.) to simplify the taxation process.

n Formulate and implement a simple and effective tobacco tax policy (for a period of 5 years), which will contribute to increase revenue.

n Bring the manufacturers of smokeless tobacco products into the tax net

n Increase price of all tobacco products regularly keeping in mind the growth of per capita income and inflation to make them expensive so that the users opt to reduce and discontinue tobacco consumption.

If the above price and tax measures are adopted, the number of tobacco users and quantity of use will decrease. An estimate of Progga reveals that if the government imposes specific duty on and increase price of all tobacco products, the government would earn an additional 12 per cent revenue only from cigarettes. At the same time, about 1.1 million adult smokers would discontinue smoking and 0.8 million young population would not be interested to start smoking.

Thus, it is imperative for the government to introduce price and tax measures to help generate additional revenue. It will also help achieve the Hon'ble Prime Minister Sheikh Hasina's commitment to achieve a tobacco-free Bangladesh by 2040. It will also enable the government to finance the country's health and developmental priorities in the near term, especially to counter the menace of Covid-19 pandemic.


Dr Mahfuz Kabir is Research Director, Bangladesh Institute of International and Strategic Studies (BIISS), Dhaka.

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