Specific tax on tobacco could generate an additional Tk23,000 crore in 10 years: Study

A study by the Policy Exchange Bangladesh (PEB) has found that replacing the existing ad-valorem tax system with a specific tax regime on tobacco products could generate an additional Tk22,654 crore in revenue over the next 10 years.

According to the study, under the current ad-valorem system, the government is expected to collect around Tk541,456 crore in revenue from the tobacco sector over the next decade. In contrast, if a specific tax system is implemented, revenue collection could rise to Tk564,110 crore.

These findings were presented by Hasnat Alam, economist and senior manager of PEB, at a workshop held today (7 April) at the office of the Economic Reporters Forum (ERF) in the capital's Paltan.

The workshop, jointly organised by ERF and PEB, was titled "Optimising Tobacco Taxation System for Greater Revenue Generation in Bangladesh."

Currently, the government collects around 83% tax from the tobacco sector through VAT, supplementary duty, and health surcharge.

Under the ad-valorem system, the government sets tax rates as a percentage and also determines product prices.

In contrast, under a specific tax system, the government sets a fixed tax amount or rate, while companies are allowed to determine product prices.

In his presentation, Hasnat Alam noted that Bangladesh operates a highly complex, multi-tier ad-valorem cigarette tax system, differentiated by product type, filter status, and four price tiers.

He stated, "Specific excise-based systems deliver superior outcomes, offering greater revenue stability, predictability, administrative simplicity, and stronger reductions in tobacco affordability."

On the other hand, "Ad-valorem -heavy, multi-tiered structures create distortions, including wide price gaps, down-trading, complex administration, incentives for under-reporting, and volatile revenue – challenges that are evident in Bangladesh today."

He added, "International experience shows consistent gains from transitioning to specific taxes, with improved fiscal performance and more effective public health impact."

However, concerns were also raised at the event regarding whether companies might increase prices arbitrarily and earn excessive profits if a specific tax system is introduced and firms are given the authority to set prices.