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Review tobacco products pricing structure to collect more revenue

The proposed price increase for the low segment cigarettes will take us one step forward towards the government’s goal of curbing smoking to protect public health while collecting Tk 1,000-1,200 crore in additional revenue
Dr. Ahsan H. Mansur
Review tobacco products pricing structure to collect more revenue

Revenue collection at the end of FY 2019-20 predictably fell short of the budget target by a wide margin. There were three major reasons: first, the setting of an over-optimistic target; second, the institutional weaknesses of the National Board of Revenue (NBR) which have been deteriorating steadily in recent years; and third, the adverse impact of the still uncontrolled novel coronavirus on domestic economic activity.

The government had to declare a national holiday to fight the pandemic. Most other countries also had to resort to similar strategies. Consequently, the world economy also fell into a deep recession.
 Finance Minister A H M Mustafa Kamal just presented the national budget for the next fiscal year before the parliament. The proposed budget of Tk. 568,000 crore aims to collect revenue income of Tk. 382,013 crore and limit the fiscal deficit at Tk. 190,000 crore. The targeted revenue of Tk. 378,000 is ambitious given the current economic condition of the country.

Collection of revenue has never been a straightforward matter in a country characterized by the problem of weak tax administration infrastructure. The situation has been deteriorating over the last many years and thus cannot be reversed easily without undertaking fundamental broad-based reforms in tax policy and tax administration. Since no major reforms have been undertaken in many years and under current circumstances the government will be unable to raise tax rates or base on a significant scale, the stipulated revenue collection is unlikely to be attainable.

The NBR has traditionally been able to rely on a few sectors, and tobacco happens to be one of them. Among other reliable sectors, telecom already contributes heavily toward revenue and it would be impractical to try to squeeze more out of this sector without undermining the growth potential of this growth augmenting sector. In the case of tobacco, the government has already increased the prices to collect more revenue, but there is still room for further price adjustment and collecting higher amount of revenue from the sector.

Rationalizationof tobacco pricing structure can generate a significant amount of additional revenue without disrupting the ecosystem. The government has been increasing prices of cigarettes for all segments almost every year to collect more revenue and the current budget is no exception. The largest share in the cigarette market is what in the segment called the low segment cigarette. There is scope for getting more revenue by the government out of this segment.

Under the proposed budget, prices for the premium and highsegment cigarettes have been increased by Tk. 4 to Tk. 5 per packet. In contrast, the price increase for the low segment cigarettes have been proposed to be increased by mere Tk. 2 per packet. In terms of number of cigarettes sold or smoked, the low segment accounts for about 70% of total cigarette consumption. Due to the very low increase in price per pack of 10 in the low segment,the NBR will be losing the opportunity of mobilizing a much large amount of revenue. If the price for this slab can be raised to Tk. 5 per pack, the government can earn an extra Tk1,000 crore to Tk. 1,200 crore in revenue from this sector, and it will help the government to earn additional revenue. The NBR still has time to review this price before the budget is finalized by the parliament.

As proposed in the budget,stick price of Tk. 39 per packin the low segment will increase to taka 5 per stick which previously used to be sold at Tk. 4 per stick. Even if the price per pack is increased to Tk. 42 the retail price per stick would remain at Tk. 5 per stick. Raising the price by Tk. 5 per pack for the low segment cigarettes will mean that the government gets to keep half of the money and the other half will go to the pockets of small retailers.As proposed, the government will get only Tk. 2 and the retailers will get Tk. 11 per pack.

This is a win-win for everyone and the consumers are not impacted because they mostly buy in terms of sticks. NBR should always assess the impact of any measure on the final retail price when adjusting cigarette prices or taxes. Since the retail price impact would be same whether the NBR increases prices of low segment cigarettes by Tk. 2 or by Tk. 5 per pack, it would be unwise not take advantage of this situation. Why should NBR give up Tk. 1,000-1,200 crore of revenue?

The NBR, of course,must be very vigilant and make sure that the lower slab consumers do not move toward illegal and counterfeit products and the across-the-board price increases proposed in the budget do not help increase the size of the black market. Last year, the NBR successfully deployed the police and RAB to carry out operations against illegal manufacturers. It has to take similar steps next fiscal year as well. Establishment of the rule of law is the real answer to the problem of tax evasion. This is particularly important in the case of very highly taxed cigarettes and tobacco products in every country and Bangladesh is no exception. This is why NBR has to remain always vigilant and keep its eyes opened.

We fully endorse Bangladesh Government’s dual objective of discouraging consumption of tobacco products through higher taxes/prices, and in the process collecting additional revenue for the budget. This is also the standard global practice vis-à-vis tobacco products. The proposed price increase for the low segment cigarettes will take us one step forward toward the government’s goal of curbing smoking to protect public health while collecting Tk. 1,000-1,200 crore in additional revenue.

 

Writer is the Executive Director, Policy Research Institute (PRI)

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Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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