The Financial Express

Protecting government revenue through cautious policymaking

| Updated: April 23, 2022 20:49:39

Protecting government revenue  through cautious policymaking

Bangladesh aims to become a tobacco-free nation by 2040, i.e. within the next 18 years. One of the steps taken to address this is increased taxation, a move which has also led to an increase in revenue from tobacco products.

Bangladesh’s tobacco market has both smokeable and non-smoking tobacco products, including bidis, cigarettes, gul, jorda, snuffs, etc. Cigarettes are the most commonly used tobacco product in the Bangladesh market, with over 20 million consumers. Cigarettes are divided into 4 different segments: premium, high, medium and low. Below this, in a lower tier, are bidis. The National Board of Revenue (NBR) is responsible for determining the market value of tobacco products, including cigarettes, which are categorized according to product quality and market price.

We all know that smoking is highly injurious to human health. It is harmful not only to smokers themselves but to those around them, as well as to the environment. That’s why globally, cigarette price-setting leans towards incremental changes. In Bangladesh, according to officials, higher cigarette prices will cause the poor to quit or reduce their smoking. However, the reality has proven to be different. While the behaviour of most premium- and high-segment cigarette smokers remains largely unchanged, the same does not apply to mid-segment cigarette consumers, who tend to switch to low-segment cigarettes. Similarly, low-segment cigarette consumers shift to even lower-quality tobacco products such as bidis (a cheap, low-quality smokeable tobacco product which contains higher amounts of nicotine and tar than traditional cigarettes) and contraband cigarettes, the manufacture of which is not regulated.

In the FY 2021-22 budget, the price of a pack of 10 sticks of low-segment cigarettes was set at Tk 39 with a supplementary duty of 57%. For mid-level cigarettes, the price of a pack of 10 sticks is Tk63 or higher; a 10-pack of high-segment cigarettes costs Tk 102 or more; and the price of 10 premium-segment sticks was Tk 135 or more.

In the FY 2021-22 budget, the local bidi industry did not face any price increments. As in the previous year, the price of 25 sticks of hand-made, unfiltered bidi was fixed at Tk 18, 12 sticks set at Tk 9, and 8 sticks at Tk 6, with a 30% supplementary duty.

After the implementation of this new price roster, many different reactions have been observed. Particularly the government's decision not to increase bidi prices has met various criticisms. According to analysts, it is natural for middle-segment cigarette consumers to seek out and consume low-cost cigarettes. With the increase in cigarette prices, either product substitution occurs, or consumers become dependent on bidis and illegally traded cigarettes whose unscrupulous manufacturers are evading taxes.

These illegally traded cigarettes are a result of tax evasion efforts, which occur through the use of counterfeit or reused tax stamps and banderoles. Banderoles and tax stamps are meant to be affixed on cigarette packets to certify that the manufacturer has paid tax to the government. However, unscrupulous traders use fake tax stamps and banderoles (even recently, in March 2022, one consignment by a shell company, of falsely declared A4 size papers, was actually found to be a shipment of over 32 million pieces of counterfeit tax stamps from China), or reused ones, in order to evade taxes and gain higher profits. Naturally, this occurrence is higher when tobacco taxes are particularly high. Therefore, not only is the government losing revenue as a result of consumers buying these counterfeit or illegally tax-stamped cigarettes, but legal, tax-paying entities are also suffering.

When cigarette prices are being set, income ratio and inflation should be evaluated, accounting for positive changes in purchasing power of low-income groups. For example, for a rickshaw-puller whose income went from being Tk 5/1km in 2002 to Tk 20/1km in 2022, income increased 300%. However, bidi prices increased very little in comparison, leading to a higher number of bidis being consumed by the rickshaw-puller. This is why experts say the problem could be solved if the NBR is more cautious about cigarette price inflation. Bidis pose a much-greater health risk compared to mid-or low-segment cigarettes. So, removing bidis from the market should be done by gradually increasing taxes (and subsequently, prices). The removal of bidis from the market might increase the demand for low-segment cigarettes.

However, it’s also notable that when the demand for low- and mid-segment cigarettes increases, greater scope is created for the illicit cigarette trade’s growth. Such entities must be brought under the law. Law enforcement agencies have been actively engaged in the prevention and control of this issue by carrying out periodic raids, but greater surveillance is required.

Economists, as well as anti-tobacco campaigners and health campaigners, expect that the country's revenue will increase by around Tk 20 to 30 billion if alongside effective measures to curb banderole fraud, the price of low-end cigarettes is increased. They also hope that this will lead to reduced cigarette consumption.

It’s important to ensure that the higher cigarette prices set by the NBR do not lead to the rise of using counterfeit/reused banderoles and tax stamps. Furthermore, the impact of the illicit cigarette trade must be recognized in order for the government to prevent revenue loss.

Alongside more sensible policymaking, on-ground awareness campaigns must also be carried out about the dangers of consuming low-quality cigarettes such as bidis. In this way, the road to rid the country of tobacco by 2040 will be made much smoother.

The writer is former member (VAT Policy) of NBR.

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