How should the government respond to the illegal cigarette trade?

In Bangladesh, the tobacco industry is the largest source of internal revenue for the government, constituting approximately 11% of the government's earnings. In 2021 alone, the government made BDT 28,000 crore in cigarette revenue. However, this revenue could be much higher.

Every year, the Bangladesh government is defrauded of crores of taka by the illegal cigarette trade, and this is an issue that only seems to be expanding with each passing year. However, this is not the only issue–when cigarette prices and taxes are increased, law-abiding, tax-paying cigarette traders also suffer due to lower sales, which in turn once again reduces the government's revenue from this sector.

Experts opine that both of these issues can be traced back to the prices of cigarettes being increased drastically during every annual budget. When the prices of medium- and low-segment cigarettes are raised, medium-segment consumers have no choice but to shift to low-segment cigarettes, while low-segment cigarette consumers are led to shifting to even lower-tier cigarettes–this includes bidis and fake cigarettes, or very cheap cigarettes affixed with counterfeit or reused banderoles and tax stamps (which are used in order to evade taxes). As such, through product substitution, cigarette smokers spend less, and the government receives a smaller revenue.

This is because increasing cigarette prices does not prevent smokers from spending money on tobacco, as cigarettes have relatively inelastic demand when compared to the majority of consumables (when a product has inelastic demand, it means that large changes in price only lead to small changes in the quantity demanded of that product). This simply means that, when smokers' preferred cigarettes' prices are increased, they are more likely to seek cheaper alternatives than to give up the habit of smoking entirely. Therefore, it is clear to see why this price sensitivity is a highly common occurrence in the behavior of consumers of medium- and low-segment cigarettes: because a significant portion of their income goes to buying cigarettes, they must resort to smoking lower-priced cigarettes in order to sustain their habit.

Meanwhile, the issue of the illegal cigarette trade continues to gain in size each year, further threatening the government's revenue levels. According to experts, the yearly increases in the price of cigarettes fosters the growth of the illegal cigarette industry. This is accomplished primarily through two methods: the manufacture and distribution of counterfeit cigarettes, as well as the use of counterfeit or reused tax stamps and cigarette pack banderoles which allow the traders to avoid paying taxes. Both of these events are rooted in tax evasion by unscrupulous cigarette manufacturers and traders who are taking advantage of the higher prices set by the National Board of Revenue (NBR) to appeal to a market of inelastic cigarette consumers.

Various studies, including those carried out by the Tobacco Control and Research Cell of Dhaka International University and the Bangladesh Network for Tobacco Tax Policy (BNTTP), have found that the use of counterfeit stamps and banderoles, and the discharge of fake cigarettes, is causing the government to lose an upwards of Tk2,000 crore in revenue annually.

And, since such cigarettes are sold in remote areas where the arm of the law is less likely to reach, the illegal trade only continues to grow. Market surveillance shows that a 10-stick pack of low-segment cigarettes is available in markets for Tk20 to Tk25, when in reality, at this point of time, the price of such a pack is fixed at Tk39 by the government. How are these startlingly lower prices made possible? That can be attributed to the cigarettes being counterfeit, or lower-priced due to tax evasion.

This also calls into question another critical point: the illegal cigarette trade does not reduce the government's revenue only through tax evasion–it also increases the government's public health spending due to higher consumption of lower-quality cigarettes. Once again, smokers (especially smokers of cigarettes in two particular segments) are unlikely to stop smoking entirely as a result of increasing cigarette prices; rather, they are seen switching to cheaper alternatives which may or may not be fake and pose greater health risks.

The national budget for the fiscal year of 2019-2020 can be seen as an example of significant price increases. In that budget, the NBR increased the price of tobacco products significantly in a bid to curb consumption of cigarettes and to grow revenue. In the medium segment of cigarettes, the price was raised to Tk63 from Tk48, a considerably large increase of 31.25%. Of the new retail price of these cigarettes, a 65% supplementary duty would have to be paid to the government, along with 15% value-added tax (VAT) and 1% health development surcharge.

For reasons which are increasingly obvious, these phenomena not only lead to smokers opting for product substitution (often harmful), but give rise to the illegal cigarette trade. As such, the question that arises is: what is the solution to this seemingly never-ending issue?

The answer lies with the National Board of Revenue (NBR).

As the thriving illegal cigarette trade shows, law enforcement alone is not enough; instead, consistent tax policies are the key. It is imperative to ensure that the price-setting of cigarettes is done cautiously by the NBR during the annual budget, similar to the budget of the last fiscal year 2021-22.

In an important case study, illegal cigarettes started appearing in the market in the budget of 2018-19 when the retail price of low- and medium-segment cigarettes went up from Tk3 to Tk4 and Tk5 to Tk7. In contrast, for the revenue collection in the 2021-22 financial year, the NBR chairman's decision to impose a deliberate tax policy on tobacco products was well-considered.

Of course, it is important to raise cigarette prices in order to fulfill the Hon'ble Prime Minister's stated aim of making Bangladesh tobacco-free by 2040. However, it is also in the government's best interest to protect its largest source of internal revenue, which can be achieved by keeping prices steady in the upcoming FY 2022-23 budget. With the global economy still recovering from the turmoil caused by the pandemic, stabilizing such a significant revenue source is a reasonable priority for the Bangladesh government.

Rather than abrupt price rises, the goal should be to gradually raise prices in order to successfully address the aforementioned difficulties, and take the steps necessary to avoid revenue loss while also minimizing health risks to cigarette customers.

The writer is a freelance journalist