Is tobacco tax a potential source?

Budget 2023-24 is approaching in unprecedented adverse circumstances wherein the world economy is undergoing protracted slowdown along with high inflationary pressure, turmoil in supply chains, energy shortage, and rapidly declining foreign currency reserve. The predominance of the US dollar as a means of medium of exchange is also at the risk. According to the statistics of the International Monetary Fund (IMF), nearly one trillion dollars has disappeared from the global stock of reserve currency between the fourth quarter of 2021 and 2022. The export earnings and remittance inflow in Bangladesh are also not demonstrating expected performance because of general decline in demand at the international market and dominance of informal channel in sending remittances. The is aggressively borrowing from the IMF, World Bank, Japan International Cooperation Agency (JICA), and other sources to reduce pressure on foreign exchange reserve and implement development projects that include mega infrastructure, education, public health, social protection and climate resilience.

The planned expenditure of the budget-2023-24 is a massive one—Tk.7.6 trillion. Of the outlined spending, the revenue target is Tk.5 trillion while the target of the National Board of Revenue (NBR) is Tk.4.3 trillion. It is, nevertheless, an ambitious target given the performance of the NBR is the first ten months of the outgoing fiscal year (July 2022-April 2023). Initially the revenue target was Tk.3.7 trillion in the FY2022-23 while the revised target was Tk.3.3 trillion. However, only about 75 percent of the revised target could be achieved within the first ten months. It can readily be assumed that given the endline of the fiscal year and the domestic spillover of ongoing global economic slowdown, the revised target is unlikely to be fully achieved. Thus, resource mobilisation from both domestic and external sources for deficit financing remains a major challenge for the government.

The country has taken loan from the IMF with several important recommendations rather than stringent conditionalities, which includes increasing the tax-to-GDP ratio by 0.5 percent in FY 2023-24, 2024-25, and 0.7 percent in FY 2025–26. That means, Bangladesh needs to earn an additional revenue of Tk 2.34 trillion by 2026, which is two-thirds higher than the tax collection target of the outgoing fiscal year. From where this additional tax revenue come given the macroeconomic slowdown which is likely to continue in the next fiscal year?

While the government can administer several fiscal instruments, such as expansion of tax coverage and implementation of the Value Added Tax (VAT) law, tobacco tax reforms along with price measures can help the government generate significant amount of additional revenue while reducing tobacco consumption.

Tobacco use is a major threat to public health in Bangladesh as it causes more than 0.16 million people to die every year. Women and children are serious victims of direct and indirect use of tobacco consumption through at least 30 fatal and complicated diseases. The estimated economic loss due to tobacco use was more than Tk.300 billion in 2016-17 while the government collected about Tk.230 billion revenue from the tobacco sector. Thus, a significant amount of money has been lost from tobacco use. Despite such non-trivial tangible and non-tangible negative consequences, tax and price measures are yet inadequate to effectively reduce tobacco consumption and at the same time to increase tax revenue.

The Hon’ble Prime Minister Sheikh Hasina has pledged to make Bangladesh “tobacco-free by 2040”, which calls for implementation of Article-6 of the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC) through formulating and implementing a simple tax and price policy to reduce the demand for tobacco. The Hon’ble Prime Minister Sheikh Hasina has also directed to formulate a strong, simple and effective tobacco tax policy in 2016. However, it has not been implemented even after seven years of her directives.

The current tobacco tax-price structure in Bangladesh is a complex one, which is not enough to discourage the use of tobacco products. There is an ad valorem supplementary duty on the price of each product, such as bidi (filter and non-filter), jarda, gul (snuff tobacco), and the cigarette by price tier (premium, high, medium and low), which does not work properly. In addition, there is a scope to buy products at multiple price tiers. Besides, the increase in the price of tobacco products through taxes in the budget is not in line with the increase in the annual per capita income and inflation. Despite continued high inflation for a year, the nominal price of tobacco products remained same. Therefore, the real price of cigarettes has substantially decreased that encourages people, especially young and poor ones to continue using cigarettes.

Besides, tobacco companies are getting special benefits due to the existing tax and price system. The supplementary duty on cigarettes has not increased much in the last few years. That is why tobacco companies are making huge profits because per capita income of the people is increasing and the real price of tobacco products is decreasing. Therefore, the existing tariff structure needs to be reformed. As about 75 percent of smokers use low brand cigarettes, supplementary duty on this category is 57 percent, which should be increased to 65 percent in line with the other brands. Specific excise tax has to be imposed in place of the ad valorem system in order to effectively reduce the use of tobacco products and increase government revenue from the sale of tobacco products. The specific duty can be introduced on the number of sticks in the case of bidi and cigarettes or on the weight of the smokeless tobacco product.

A study by Progga found that the introduction of specific duty could significantly increase the government’s revenue. Imposing specific supplementary duty will enable accurately project the revenue that the government can generate from tobacco. In this case, revenue collection will be much easier and the cost of revenue collection will be reduced. In addition, the government will have to reduce the price tiers into two instead of four in the medium term, which would help make precise predictions about revenue.

If prices and taxes are reformed in this way, it will be possible to generate additional revenue of more than Tk.96 billion from supplementary duty, health development surcharge and value added tax (VAT). In other words, the government will be able to get additional revenue of 30 percent from cigarettes. This will reduce the use of cigarettes. Young people in particular will be discouraged to commence smoking. Increasing the price of smokeless tobacco products will discourage the use of these products among low-income people and will enable the government to collect significant revenue from such price and tax measures.

Thus, price and tax reforms on tobacco products is imperative keeping in mind the challenges of uncertainties in revenue mobilisation. These will generate additional revenue for the government. Thus, it would help generate additional tax revenue and increase tax-to-GDP ratio in line with the suggestion of the IMF. With this additional revenue, the government will be able to address some of the pressing developmental and public health priorities.

The writer is Research Director, Bangladesh Institute of International and Strategic Studies (BIISS), Dhaka. He can be contacted at [email protected]