Ad Valorem and multilayer system boosts companies’ earnings, but the taxes remain the same
The Bangladesh government has taken an initiative to cut down tobacco use to zero under a World Health Organization directive, but the inappropriate tax policy on tobacco control is actually benefitting this particular sector.
According to several experts, most countries across the globe are using a Specific System to cut down tobacco use. However, Bangladesh is taxing the tobacco companies under the Ad Valorem and multilayer system, which is also preferred by these companies.
Under the Specific System, the government allows the manufacturer to set the price of a product and then it imposes taxes on it. Later, the government can increase the taxes at its discretion.
However, under the Ad Valorem system the government increases the price of each cigarette instead of increasing the rate of taxes on the tobacco product. This system allows a tobacco company to make profits in parallel with the taxes.
For example, if a pack of ten cigarettes sells for Tk100 with a 70 percent tax rate, the government gets Tk70 as revenue and the company makes Tk30.
The government increases the price of each cigarette almost every year using the Ad valorem system. Even if the price of a pack containing ten cigarettes increases to Tk150, the tobacco company continues to pay the 70 percent tax.
So, the earnings of that company jumps from Tk30 to Tk45 per pack.
This system boosts these companies' earnings, but the taxes remain the same. The tobacco companies in the country have been expanding their businesses through new investments and their earnings are steadily going up as well.
Addressing the issue, the director of the Brac Institute of Governance and Development Research and former chairman of the National Board of Revenue Md Nasir Uddin said, "In most countries, specific taxation causes the price of cigarettes to go up and the earnings of tobacco companies to drop.
"In Bangladesh, the tobacco companies' earnings have gone up because of the Ad Valorem and multilayer taxation policies."
Quoting a research paper titled The Economics of Tobacco Taxation in Bangladesh, Nasir Uddin said, "The revenue from the tobacco sector in Bangladesh has increase by 11.02 percent in the past 4 years.
"In the same period, the tobacco companies' profit has increased by around 20 percent."
After analysing last year's annual report of the British American Tobacco, The Business Standard found that the company doubled its net profit in the past four years.
British American Tobacco has a 65 percent stake in Bangladesh's tobacco industry. The company made a net profit of Tk1001 crore in 2018, compared to Tk587 crore profit it made in 2015.
National Tobacco Control Cell Coordinator Md Khairul Alam Sheikh said, "The inappropriate tax policy is aiding the expansion of businesses of the country's tobacco companies, including the British American Tobacco.
"If the government decides to fix the tax policy, the total annual revenue will go up by Tk7,000 crore. The move will also encourage 3.2 million adults in the country to quit smoking. Cigarette consumption will drop from 14 percent to 12.5 percent and Biri consumption will drop from 5 percent to 3.4 percent."
Taxation on tobacco across the globe
The majority of the countries use the specific system of taxation for the tobacco sector.
According to the World Health Organization report on the Global Tobacco Epidemic, among the 187 countries, 60 use the specific tax system and 59 use a mix of specific and ad valorem systems.
Only 6 countries such as Ethiopia, Nigeria and Bangladesh use the ad valorem and multilayer taxation system.
Behind our tax policy on tobacco
Several experts said political motivations and lobbying from multinational companies are behind Bangladesh's inappropriate tax policy on the tobacco sector.
Former member of the National Board of Revenue and member of the Bangladesh Anti-Tobacco Alliance barrister Jahangir Hossain said, "The revenue board prepares policy in accordance with the international standard every year before the budget announcement, but we have yet to witness any positive changes.
"Firstly, many government lawmakers have their own tobacco businesses. Secondly, the government owns many shares in multinational companies and secretaries have seats in those companies' boards of directors."
He added that there is also a risk of not meeting the revenue collection target after implementing a new tax collection system for tobacco industries.
Meanwhile, denying any allegation of facing pressure, National Board of Revenue Chairman Md Mosharraf Hossain Bhuiyan reiterated his firm stance on tobacco control.
"We are increasing the tax on tobacco products every year. We are also encouraging these companies to export their products instead of marketing them in Bangladesh."