Analyzing Tax Evasion Strategies in the Tobacco Industry: Market Surveillance Study of Cigarette Pricing in Bangladesh

Introduction

Tobacco use in Bangladesh remains a pressing public health concern, facilitated by low product prices and inadequate tax measures. Despite ongoing policy efforts, including budgetary adjustments and regulatory frameworks, the country’s tobacco-related mortality and morbidity rates persist at alarming levels. According to the World Health Organization (WHO), tobacco products contain over 7,000 harmful chemicals, of which at least 43 are carcinogenic. Globally, tobacco use causes one death every six seconds, amounting to over 8.2 million fatalities annually. In Bangladesh alone, tobacco-related deaths reach approximately 161,000 annually, with low- and middle-income countries, like Bangladesh, accounting for 80% of the world’s 1.3 billion tobacco users.

Taxation is one of the most effective measures for curbing tobacco use, as higher prices reduce affordability and discourage consumption, particularly among youth and low-income groups (WHO, 2011). However, the intended impact of these policies is often undermined by strategic tax evasion practices employed by the tobacco industry.

In Bangladesh, cigarette companies exploit the loopholes of the multi-tiered ad valorem tax structure by manipulating pricing strategies, including selling cigarettes at prices higher than the Maximum Retail Price (MRP). This practice not only violates pricing regulations but also allows companies to evade significant amounts of tax revenue.

In this context, the Bureau of Economic Research (BER), University of Dhaka has been doing research for the past few years on how tobacco companies set the price of tobacco products and at what price they are sold in the market. (Rumana Huque I. Z., 2021-22) (Rumana Huque I. Z., 2022-23). The previous study conducted in Bangladesh found that in the fiscal year 2021-22, the government potentially lost BDT 4,879 crore in revenue due to tobacco companies manipulating pricing strategies, such as selling cigarettes above the Maximum Retail Price (MRP) (Bureau of Economic Research, 2021). These findings highlight the significant impact of such practices on public revenue and health policy.

This study presents a three-year market surveillance analysis of cigarette pricing in Bangladesh to examine the extent of tax evasion by tobacco companies. It focuses on identifying discrepancies between MRPs and retail prices, evaluating the effect of selling single-stick cigarettes on tax compliance, and proposing policy measures to address these challenges. By shedding light on these practices, the study aims to inform evidence-based reforms to strengthen tax administration and enhance the effectiveness of tobacco control measures.

The findings contribute to a growing body of evidence advocating for the replacement of the current tax structure with a simplified, specific tax system that minimizes loopholes and aligns with global best practices (Nargis, 2020; Campaign for Tobacco-Free Kids et al., 2022). Such reforms are essential not only to reduce tobacco use but also to safeguard government revenues and promote sustainable public health outcomes.

Objectives of the research

To identify and assess the mechanisms of tax evasion employed by the tobacco industry in Bangladesh and their economic impact, focusing on market surveillance of cigarette pricing.

Specific Objectives:

1. Quantify the revenue loss caused by discrepancies between the Maximum Retail Price (MRP) and the actual retail selling prices of cigarettes across different market tiers.
2. Examine the impact of retail stick sales on revenue evasion and determine the extent of additional losses incurred due to inflated per-stick pricing.
3. Investigate the pricing strategies adopted by tobacco companies to maximize profits while bypassing tax obligations.

Research Methodology

The research has been conducted following quantitative research methods. Information has been collected from the 48 retail outlets (points of sale vendors) of a total of 12 cities/towns. This includes the divisional cities of Dhaka, Barisal, Khulna, and Mymensingh, as well as two additional district towns from each of the divisions. Data has been collected from a total of four retail outlets in each city. These retail outlets have been selected from public places as defined by the Tobacco Control Act. In this case, the study has been completed with the information from retail outlets in front or near the Sadar Hospital, judge court or DC office area, bus stand or rail station, market, and each district town

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BNTTP

BER, DU