Introducing Specific Taxation on Tobacco Products to Protect Public Health
1. Background
Raising taxes on tobacco is the most cost-effective measure for reducing tobacco use. Evidence shows that a well-administered tobacco tax leads to the desired result of reducing consumption, particularly among youth and the poor. They also reduce the health and economic devastation caused by tobacco. At the same time, raising tobacco taxes can bring in new revenues to finance health and development efforts.
Though taxation is the most efficient and cost-effective way of tobacco control, Bangladesh could not achieve the expected results for its faulty taxation system. Due to the complex multi-tiered ad-valorem tax structure, cigarettes are remaining cheap and affordable. As a result, smokers are switching to cheaper cigarettes instead of quitting. Variation in the type of tobacco product (cigarettes, biris, and smokeless tobacco) has made the situation more challenging. Low taxes and prices of biris and smokeless tobacco keep these products highly affordable. Moreover, the ad-valorem tobacco tax structure is the cause of unexpected profit growth in the tobacco industry. To address the above problems, experts and tobacco control activists have been demanding to introduce a Specific Tax on tobacco products for many years. However, there is limited evidence on and capacity for the process of implementation of the specific tax, possible challenges, and mitigation strategies.
2. Current Tobacco Tax Structure in Bangladesh
Bangladesh has a complex multi-tiered ad-valorem excise tax system for tobacco products. In the ad- valorem method, tax is levied as a percentage of the value (e.g., retail price, or the producer/ex-factory price). Three categories of taxes: supplementary duty as a proportion of maximum retail price (MRP), Value Added Tax (VAT), and Health Development Surcharge are imposed on cigarettes, biri, zarda, and gul.
Tax on cigarettes: There are four tiers of cigarettes – premium, high, medium, and low tier – with variations in the retail prices of the four tiers. The complicated tiered ad valorem cigarette tax structure, with a low base price for each tier, has made tobacco tax a less effective instrument to control tobacco use and created an opportunity for manufacturers to avoid taxes.
3. About Specific Tax
Specific excise tax is a set monetary amount levied on a unit of tobacco products – e.g., per single cigarette; a pack of 10 cigarettes; a box of 1,000 pieces; and/or a particular weight (e.g., net weight in kilograms, as is the case for most smokeless or smoking tobacco products).
Regardless of all these effects of taxes on prices and tobacco use behavior, it is clear that ad valorem excise tax revenue depends on the industry’s pricing strategy. If ad valorem taxes go up, the industry can lower the base price and reduce the revenue collected by the government. In contrast, specific excise tax revenues per pack are relatively independent of changes in industry price. A tax system that is independent of the manufacturers’ pricing strategy increases the stability of tax revenue. This also results in specific tax system revenues being more predictable. Since specific duties are independent of changes in price, they generally produce a more stable stream of revenue.
Globally, 66 countries are practicing specific only excise taxation systems. Of them 19 are from higher- income countries, 19 from upper-middle income, 21 from lower-middle-income, and 7 from lower-income countries. A mixture of both specific and ad valorem excises tax is being applied by 61 countries, 29 of them from higher-income countries, 19 from upper-middle income, 11 from lower-middle-income, and 2 from lower-income countries (WHO Report on the Global Tobacco Epidemic, 2019).
Differences between Specific and Ad-valorem tax
| Specific tax | Ad-valorem tax |
| Specific excise is a set monetary amount levied on a unit (a stick of a pack or a box) of tobacco products and/or a particular weight (per gram or KG) | Ad valorem excise is levied as a percentage of a price point in the supply chain, for example, the factory price or the retail price |
| Effective in reducing tobacco consumption and smoking prevalence, especially among the youth | Less effective |
| Improve public health outcomes | Contribution is less than expected |
| Generate relatively more government revenue | Generate less government revenue |
| Easy to determine the amount of the tax | Difficult to determine the amount of the tax |
| Raises all product prices | Do not raise all product prices equally |
| Be administratively simple | Complex to administer |
| Relatively independent of changes in industry price. Hence, not subject to industry price manipulation | Tax revenue depends on the industry’s pricing strategy. Hence, subject to easy manipulate |
| Revenues being more predictable, generally produce a more stable stream of revenue | Revenues being less predictable |
| Does not automatically adjust with inflation | Automatically adjust with inflation |
| Requires monitoring the volume of sales | Requires monitoring the value |
- Implementation of Specific Taxation Determining tax base
Specific taxes are much easier to administer from a budget point of view because they only require determining and verifying the number of tobacco products sold or produced, depending on the country, or simply counting the number of tax stamps.
Inflation adjustment
Under specific tax systems, the specific tax would need to be increased on a regular basis to maintain its real value. While many countries do this manually, some countries (e.g., Chile) have automatic adjustments to specific taxes to maintain their real value.
Compliance-enhancing procedures
A specific tax requires monitoring the volume of sales. Evidence suggests that when systems of record- keeping are rudimentary, the physical volume may be easier to check, and specific taxation to that extent preferable. Monitoring domestic production and trade activities by conducting physical controls and requiring tax stamps are crucial. The costs of physical control increase when the potential for fraud by excise officers is considered. However, evidence shows that fraud is reduced considerably when excise officers are rotated frequently among different locations and when supervisors conduct supervision visits. Digital tax stamps provide an effective tracking and tracing system to reduce tax evasion. Digital tax systems carry information concerning the brand and manufacturers’ name, the facility where the products were produced, and the time the stamp was produced and purchased. The product can thus be traced back to its source. Banderoles and digital tax stamps differ in that the finance ministry obtains the necessary information live from the banderole system, whereas the digital system requires distributors to place an order via a secure connection to a designated government authority. After the authority verifies and approves the order, the distributor fulfills the order by delivering encrypted codes and authorizing digital stamps. However, it is important to identify how the authority verifies the order. For instance, the cigarette distributor prints the digital stamps, and the cigarettes are then shipped to retail outlets.
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Bureau of Economic Research (BER), University of Dhaka