Impact of price and tax changes in the national budget on the retail prices of tobacco products (cigarette): A cross sectional survey -

Impact of price and tax changes in the national budget on the retail prices of tobacco products (cigarette): A cross sectional survey

Introduction

Bangladesh is one of the countries in the world where tobacco products are available at low prices. As a result, the rate of smoking among young people is increasing alarmingly. At the same time, the death toll from tobacco-related diseases is on the rise. According to the World Health Organization, tobacco products, including bidi-cigarette smoke, contain more than 7,000 harmful chemicals1, including DDT, carbon monoxide, arsenic, methanol, alkatra, and nicotine, of which 43 are directly linked to cancer.

Worldwide, smoking kills one person every 6 seconds and more than 8.2 million people every year.2 Of these, 7 million people die directly from tobacco use and 1.2 million die from second-hand smoke. Of these, 0.161 million people died in Bangladesh. At present, 80 percent of the world’s 1.3 billion tobacco users3 are from low- and middle-income countries.4

The World Health Organization (WHO) drafted the International Tobacco Control Convention Framework Convention on Tobacco Control (FCTC) in recognition of the dangers of smoking. It effectively bans all forms of tobacco control campaigns, eliminates all smoking in public places and public transport, issues pictorial health warnings on tobacco products, including cigarettes, actively supports tobacco growers in alternative crop production, and the imposition of high taxes and price increases on tobacco products. According to a study by the World Health Organization, a 10 percent increase in prices would save 42 million people from smoking and save the lives of about 9 million people, especially in developing countries.5

At the same time, various international studies have shown that raising taxes on tobacco products not only increases revenue but also reduces government spending on health and reduces smoking. This image has already been noticed in different countries of the world including Australia, Thailand, Norway, and Singapore. As a result, it is necessary to impose high taxes on tobacco products regularly every year, but it is not possible in Bangladesh. The main reason for this is non-implementation of specific taxation system on tobacco products.

Bringing all tobacco products including white leaf, jorda, gul under the tax and fixing the minimum price of all tobacco products including bidi-cigarettes will have a direct impact on the consumer. This needs to be implemented quickly. At the same time, keeping in line with inflation, it is necessary to increase the tax on all tobacco including bidi-cigarettes every year. Besides, a policy has to be formulated to increase the tax on tobacco products every year.

Although the prices of nominal tobacco products increase in Bangladesh every year, only tobacco companies benefit from it. If the production doubles, the profit increases at least 5 times.6 As a result, Bangladesh has not been able to reduce tobacco related deaths due to faulty and complex tobacco tax structure. The most surprising thing is that in the last few years, the prices of daily necessities have increased several times but the prices of tobacco products have not increased at that rate. From which it is clear that the use of tobacco among the people is increasing due to the availability of cheap tobacco products.

In Bangladesh, the price and tax rate of tobacco products are fixed in the budget every year. In this context, there has been no research in the country on how much tobacco companies fix the price of tobacco products and at what price they are sold in the market. By conducting this study in the financial year 2021-22, an attempt has been made to get the answer to the above question. We think that this has made it possible for the tobacco company to unveil its pricing and marketing strategy.

Objectives of the research

The rate at which the National Board of Revenue imposes taxes on tobacco products every year is not enough to reduce tobacco use. Instead, the conventional four-tiered complex tax structure is helping people to use other tobacco products without reducing tobacco use. In order to present a realistic picture in such a situation, it is important to know the extent to which the increase in the price of tobacco products in the current (2021-22) fiscal year has affected the retail and wholesale markets and consumers. Because no such research has been done in Bangladesh. The goals and objectives of this study are generally twofold.

Overall Objective:

Determining the impact of price change in the budget of FY 2021-22 on the market price of tobacco products (cigarettes and bidis).

Specific Objectives:

  • Investigating the impact of the budget on the market prices of tobacco products.
  • Determining the difference between Maximum Retail Price (MRP) printed on the package and actual selling price.
  • Exploring the tobacco companys’ strategies in resetting the prices of tobacco products in the face of rising tax rate and price.

Research Methodology

The research has been conducted following quantitative research methods. Information has been collected from the 48 retail outlets (points of sale vendors) and the 24 wholesale outlets 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 and two wholesale outlets in each city. These retail outlets have been selected from the public places as defined by the Tobacco Control Act. In this case, the study has been completed with the information from the Sadar Hospital, bus stand, market and retail outlets of each district town or DC office area.

Result

Premium Tier

Within the premium tier, five brands were identified: Benson, Benson Switch, Benson Blue, Benson Platinum, and Marlboro. Among these, Benson and Benson Switch were the most popular brands, sold in all 48 outlets. Benson Blue was available in 35 outlets, while Marlboro was sold in six outlets. However, Benson Platinum was only found in one outlet.

These premium-tier cigarettes were sold in 20-stick and 12-stick packets. In the current financial year, the maximum retail price for a 20-stick packet was set at BDT 284, but most retailers had to purchase them from the company at a price higher than the maximum retail price (BDT 284.9058 per pack). The study found that the average retail selling prices for a 20-stick packet were BDT 310.625 for Benson, BDT 314 for Benson Blue, BDT 311.042 for Benson Switch, BDT 310 for Benson Platinum, and BDT 285 for Marlboro.

Comparing the prices to the previous financial year, it was observed that the maximum retail price for a 20-stick packet of premium-tier cigarettes increased from BDT 270 to BDT 284. However, in May and June before the budget was passed, an artificial crisis led to a price increase, with the average price for a 20-stick packet reaching BDT 296.9738. Similarly, the price of a single stick increased from BDT 14.83 to BDT 16. Overall, Benson cigarettes were being sold at a rate 7.77% higher than the maximum retail price in the current financial year.

The maximum retail price for a 12-stick packet of Benson, Benson Blue, and Benson Switch was set at BDT 170.4, but they were sold to consumers at an average price of BDT 186, BDT 189.286, and BDT 184.583, respectively. These prices were almost 8.99% higher than the maximum retail price. Furthermore, an analysis of sales in May and June of the previous financial year revealed that Benson Blue and Benson Switch were sold at prices 11.22% and 10.42% higher than the maximum selling price.

High Tier:

In the high tier, BATB dominates the market with four brands: Goldleaf, Goldleaf Special, Goldleaf Switch, and Capstan. Goldleaf is the most widely available brand, found in 43 out of 48 outlets, followed by Goldleaf Switch in 27 outlets, Goldleaf Special in 11 outlets, and Capstan in 6 outlets. Notably, no brand in this tier offers a 10-stick packet, but 12-stick packets of Goldleaf and Goldleaf Switch are available in only 2 outlets.

Table 2 Average Buying, and Selling Price of 20-Stick Packet of High Tier

The maximum retail price (MRP) for a 20-stick packet of Goldleaf, Goldleaf Switch, and Goldleaf Special should be BDT 222 according to the budget, but the average prices observed are BDT 236.418, BDT 236.179, and BDT 238.454, respectively. These prices reflect increases of 6.09%, 5.88%, and 5.17% from the MRP. Furthermore, these prices are 8.41%, 7.06%, and 9.63% higher than the MRP in May and June, and 9.24%, 9.34%, and 11.14% higher than the previous financial year, respectively.

Capstan cigarettes, on the other hand, do not offer 10-stick or 12-stick packets. The 20-stick packets are sold at an average price of BDT 239.1667, which is 7.90% higher than the MRP. Similarly, it reflects a 7.90% increase compared to the previous financial year and an 8.66% increase from the MRP in May and June.

Goldleaf, Goldleaf Switch, Goldleaf Special, and Capstan are available in wholesale outlets. The 20-stick packets of Goldleaf, Goldleaf Switch, and Goldleaf Special are found in 21, 17, and 6 outlets. Capstan is available in 3 outlets. The average prices observed for these brands at wholesale outlets are slightly higher than the MRP, with Goldleaf at BDT 224.381, Goldleaf Switch at BDT 224.176, Goldleaf Special at BDT 225, and Capstan at BDT 227.

These prices represent increases of 1.03%, 0.87%, 1.14%, and 2.12% from the MRP, respectively. Compared to the previous financial year, these prices are slightly higher.

 

Medium Tier:

In our 48 selected retail outlets, 5 brands of mid-tier cigarettes have been found available. These brands are BATBs’ – Star, Lucky Strike, Lucky Strike Switch, Japan Tobacco’s Navy, and Black 1 from a different company. Among these brands, Navy was the most widely available, found in 43 outlets, followed by Star in 27 outlets, Lucky Strike in 24 outlets, Lucky Strike Switch in 17 outlets, and Black 1 in 2 outlets. However, only Star and Navy were available in 10-stick packets, with Star found in 9 outlets and Navy in 7 outlets.

In the fiscal year 2022-23, the prices of some medium-tier cigarettes experienced changes, while others remained the same as the previous year. The 20-stick packet prices of Star, Navy, and Black 1 increased from BDT 126, BDT 126, and BDT 112.5 to BDT 130, BDT 130, and BDT 117.5, respectively. However, Lucky Strike and Lucky Strike Switch maintained their prices at BDT 164.

Table 3 presents the average buying and selling prices of the 20-stick packets for each brand in both the previous and current fiscal years. It highlights the changes in the maximum retail price (MRP), average purchasing price, average buying price of retailers, and single stick price.

The analysis reveals that the single stick price of Navy and Star cigarettes is BDT 7 and BDT 6.9, respectively. In contrast, Black 1, Lucky Strike Switch, and Lucky Strike are priced at BDT 10 per stick. Notably, during May and June, these brands were sold at prices exceeding the maximum retail price by 8.25% and 7.73%, respectively. This represents a slight increase compared to the previous fiscal year (0.46% and 0.32%).

Furthermore, the 10-stick packets of Lucky Strike and Lucky Strike Switch, with a maximum price of BDT 63, were sold at an average price of BDT 68.6 and BDT 69.06, respectively. These figures indicate a price increase of 8.13% and 7.54% compared to the maximum price. Additionally, they represent a 0.70% and 1.94% increase compared to the previous fiscal year, while in May and June, the prices were 0.12% and 0.55% higher.

Low Tier

This is the highest variety sold 9 brands among them, 6 brands belong to BATB named Derby, Derby Style, Royal, Royal Nexus, Hollywood, and Pilot; 3 brands belong to Japan Tobacco JTI named Sheikh, Sheikh 100, and Sheikh White.

The price of a 10-stick packet of low-tier cigarettes in the financial year 2022-23, has raised to 40 taka. Analysis of the data collected from our selected 48 retail outlets shows that low-tier cigarettes are the types of cigarettes that are sold in the highest amount in the market.

None of the 9 low-tier brands have a 12-stick packet. The highest-selling brand of this tier is Derby and Hollywood’ 20-stick packets, found in 32 retail outlets and 10-stick packets were found in 14 and 3 retail outlets. The next best-selling brand is Royal 20-stick packets sold at 29 retail outlets and 10-stick packets were sold at 12 retail outlets. Others are found in some of the outlets.

Similar to the other brands of the rest of the three tiers, discrepancies in the retail sale price were also observed in the brands of low-tier cigarettes. In the case of Derby and Derby Style, the maximum price of a 20-stick packet of both brands is fixed at BDT 80. But they are being sold at an average of BDT 97.355 and BDT 99 respectively, in the current fiscal year. They were sold at the price of 78 taka which signifies that the selling price surged by 3.88% and 4.21% in terms of the fiscal year 2022-23 and 2021-22.

The maximum price of a 10-stick packet of cigarettes for these brands is fixed at BDT 40. However, it is being sold at retail outlets for BDT 50 which are 2.94% and 11.11% higher than the maximum retail price compared to the previous year. The maximum retail price of a 20-stick packet of both Royal and Royal Nex brands is BDT Rs 104 but they are sold at BDT 116.276 and BDT 117.77 respectively. Which is 18.19% and 18.39% more than the fixed maximum retail price and increased by 19.05% and 23.81% for 10-stick cigarettes as they are sold at is BDT 60.

Besides, though the maximum price of a 20-stick packet of Sheikh, Sheikh White, and Sheikh 100 cigarettes is BDT 80, they are being sold at an average of BDT 95.4, BDT 9, and BDT 100 respectively which is 17.71%, 11.41%, and 28.21% higher than MRP, respectively, and shows a 3.91% and 4.72% rise compared to the last financial year.

Moving on to the brands Pilot and Hollywood, the maximum retail price of a 20-stick packet of them is set at BDT 80. But it was observed that on average, Hollywood was at BDT 95.406, and Pilot was sold at BDT 93.45. These prices are 17.03% higher for Hollywood, and 11.95% higher for Pilot from the maximum retail price.

Tax Evasion by Cigarette Companies

The study estimated that the government was losing a significant amount of revenue, approximately 5 thousand crore BDT, due to tax evasion by cigarette companies in the current financial year. To calculate the revenue loss, the study compared the maximum retail price with the actual retail sale price for different tiers of cigarettes.

It was observed in the study that though the maximum retail price printed on a 20-stick packet of a premium tier cigarette is BDT 284, it is being sold at a higher price. Its average retail price is BDT 306.13. As such, if the tax could be levied on the highest retail price that is operational in the market, the government could get a further tax of about BDT 617.87 crore from the premium tier cigarettes.

Similarly, the estimated revenue loss for high, medium, and low-tier cigarettes was approximately BDT 245.45 crore, BDT 181.89 crore, and BDT 3399.23 crore, respectively. It would have generated a total additional revenue of around BDT 4444.44 crore a year. If these cigarettes are to be sold to the general consumer at the maximum retail price printed on the packet, the tobacco companies would have to supply them in the market at a reasonably less price or with a commission. Since the retailer has to buy them at almost the same price as the maximum retail price from the company’s suppliers, he is selling at a higher price for natural reasons. Therefore, it is clear that the companies are deliberately resorting to this unethical approach for extra profit. Since the company is making these profits in an unethical way, there is no room for doubt as to whether they are reporting these profits and evading taxes or not.

Recommendations

  1. Cigarettes should be categorized under two tiers, instead of the existing multiple tiers.
  2. Mentioning the maximum retail price on the packet of cigarettes should be made mandatory. Simultaneously, it should be ensured that cigarettes and bidis are being sold at the maximum retail price. The violators should be brought under punishment as well as charges should be levied for previous illegal business strategies.
  3. Adoption and implementation of digital methods with emphasis on market monitoring.
  4. Ensuring that foreign cigarettes are sold in accordance with the prevailing tobacco tax structure in the country. In case of irregularities, prohibit imports if necessary.
  5. Filtered and unfiltered bidis should be brought under the same tier. At the same time, the facility of selling bidi in any other size besides the 20 or 25-stick packet should be stopped.
  6. The retail sale of single-stick cigarettes and bidis should be banned. Because the government is losing huge revenue and the tobacco consumers are also being encouraged through this practice.
  7. Specific taxes should be levied on cigarettes and bidis to increase revenue and reduce tobacco use, instead of the current ad valorem tax system.
  8. A national tobacco tax policy needs to be formulated to tackle the overall issues related to tobacco control and build a tobacco free Bangladesh by 2040.

Conclusion

The government seems to be quite sincere in realizing the declaration made by Honorable Prime Minister Sheikh Hasina to make Bangladesh tobacco-free by 2040. However, we are far behind in taking the necessary initiatives that should be taken in achieving this goal within the expected timeframe. There is no alternative to adopting and implementing a tobacco tax policy as soon as possible to eliminate the use of tobacco by 2040.

BER, DU

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