Budget 2025-26: Tobacco tax can address revenue shortfall

The economy of Bangladesh is currently going through several challenges. Despite many positive steps taken by the interim government, persistent high inflationary pressures, disappointing domestic and foreign investment, political instability, high unemployment and stagnation in trade and commerce have trapped the economy in a low-level equilibrium. 

According to a recent report by the World Bank, GDP growth in the current fiscal year may be only 3.3%. Such low growth is taking Bangladesh back three decades. The vicious cycle of high inflation, low growth, low investment and high unemployment has created a risk of three million new people falling into poverty.

Due to low trade and commerce, the government's revenue collection situation is also very unsatisfactory. Due to this, the government is having to cut the budget for the outgoing fiscal year to Tk7 trillion. 

Due to poor revenue collection, the government was somewhat compelled to increase value-added tax (VAT) and supplementary duty on more than 100 goods and services in the middle of the fiscal year, which created a strong negative reaction among the people. As a result, the government had to make some amendments afterwards.

The government has to keep these challenges in mind in the budget for the next fiscal year. Especially due to the fear of low revenue collection, the government has to prepare a relatively small budget, the size of which may be Tk7.9 trillion. The revenue collection target of the National Board of Revenue (NBR) is also being reduced to Tk4.99 trillion. 

However, due to the lack of automation of the NBR, revenue collection may be even lower at the end of the fiscal year. On the other hand, many believe that the possibility of domestic and foreign investment taking off before the national elections is very low.

Meanwhile, international development partners are reducing their promises and implementation of assistance. Even though the International Monetary Fund (IMF) has decided to release two instalments of the loan contingent upon executing two stringent conditions, such as bifurcating NBR into two new institutions called revenue management and policy divisions and leaving official exchange to the market, other development partners are not coming up with significant commitments. And with all the challenges, the government's scope to borrow from domestic sources from the banking system is also decreasing. 

In the next budget, Tk1.33 trillion has to be allocated to pay the interest on domestic and foreign loans, which is about 16.8% of the total budget. Therefore, the next budget is very small in size. 

In this situation, there is an opportunity for some innovative steps in the field of taxation in the next fiscal year's budget, which can increase the revenue income of the NBR and facilitate budget implementation. Tobacco tax can be an important area of ​​innovative steps for increasing revenue collection.

Tobacco products are very cheap and easily available in Bangladesh. Despite being the first signatory to the Framework Convention on Tobacco Control (FCTC), Bangladesh has not yet made much progress in tobacco tax reform. It is possible to increase tax revenue, reduce tobacco consumption and reduce government medical costs for tobacco-related diseases through effective taxation.

Bangladesh is one of the largest tobacco users in the world. Among South Asian countries, Bangladesh has the highest tobacco use rate of 35.3%, compared to 28.6% in India and 19.1% in Pakistan. According to the Global Adult Tobacco Survey 2017, about 37.8 million adults in the country use tobacco. The tobacco use rate among students aged 13-15 is 9.2% (GSHS, 2014). 

As many as 161,000 people die every year in the country due to tobacco use-related diseases (WHO, 2018), and several hundred thousand more are disabled. According to research results published by the American Cancer Society in 2019, the economic loss (medical expenses and lost productivity) of tobacco use in the fiscal year 2017-18 amounted to Tk305.6 billion, which is much more than the revenue earned from this sector during the same period (Tk228.1 billion). 

Overall, tobacco use and damage in Bangladesh are increasingly posing a threat to public health, economy and environment.

Keeping in mind the economic loss due to tobacco consumption and revenue potential, the following measures can be adopted in the upcoming 2025-26 budget. First, combining low and middle tiers of cigarettes, the retail price of a packet of ten sticks should be Tk90, and retail price of 10 cigarettes at the high and premium tiers should be Tk140 and Tk190, respectively. Supplementary duty should be retained at 67%. 

Second, uniform tax should be introduced on filtered and unfiltered bidis, viz. supplementary duty 45% of final retail price. The retail price of unfiltered 25-stick bidi should be set at Tk25 and filtered 20-stick bidi at Tk20. Third, among smokeless tobacco products, retail price of zarda at should be set at Tk55 per 10 grams and gul at Tk30 per 10 grams with 60% supplementary duty. 

In addition, 15% value-added tax (VAT) and 1% health development surcharge will remain on the retail price of all tobacco products. Fourth, instead of ad valorem, measures should be taken for introducing a specific tax system and increasing the tax rate regularly in line with inflation and per capita income growth. 

Finally, a single and effective tobacco tax policy should be formulated at the earliest to reducing tobacco consumption and increasing revenue. There should be a commitment in the upcoming budget in this regard.

If the above recommendations are adopted in the upcoming budget 2025-26, there will be a revenue generation of about Tk680 billion according to a simulation conducted by Progga, which is significantly higher than that of the outgoing budget. It will be an additional source of revenue and reduce pressure on NBR in generating domestic resource. 

Cigarette consumption will decrease from 15.1 to 13.03%, about 2.4 million adults will be encouraged to abstain from smoking and about 1.7 million youth will be discouraged from starting smoking. In the long term, it will be possible to prevent premature deaths of 864,758 adults and 869,079 youth. 

The majority of the cigarette market is occupied by low and medium tiers. If these two tiers are combined, low-income smokers will be particularly encouraged to quit smoking. At the same time, the younger generation will also be discouraged from starting smoking.

Bangladesh is committed to achieving the tobacco control targets in the Sustainable Development Goals (SDGs) and the Global Action Plan on the Prevention and Control of Noncommunicable Diseases. Increasing taxes on tobacco products is a cost-effective measure to achieve these goals. The proposed cigarette tax reform for fiscal year 2025-26 will contribute to building a healthy nation, as well as provide significant additional revenue for financing the country's health sector and development priorities and developing a sustainable tax system.

Dr Mahfuz Kabir is the Research Director of the Bangladesh Institute of International and Strategic Studies (BIISS). 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.