Can tax curb tobacco use?
Wednesday, 20 January 2010
Dr. Golam Md. Munir
Can taxation the most effective price measure on the demand side interventions, curb consumption? And can it create a tobacco free environment? Or, the supply side intervention could be utilised to better control tobacco consumption.
Bangladesh is one of the most profitable tobacco markets in the world, with annual sales of around one billion dollars. According to industry data, prevalence of tobacco use is increasing among women. Of the total adult population 36 per cent smoke, 19.7 per cent consume tobacco in other forms. The prevalence of smoking among adult males is estimated at 46.8 per cent and among adult females at 25.4 per cent. In Asia 9 per cent women smoke. In smokeless tobacco consumption, adult women, accounting for 24.4 per cent outnumber adult men, accounting for 14.8 per cent. Of the young population in the 13-15 age group, 6.9 per cent consume tobacco products and 2 per cent of them smoke. Recent increase in women smokers is attributed to marketing tactics of the tobacco industry. Bangladesh's one billion dollar tobacco industry targets women as potential consumers.
An oligopoly, the industry serves a vertically integrated market. The fragmented structure of the market provides producers commanding power. Bangladesh's sellers' market provides the tobacco industry an extra advantage. British American Tobacco Company (BATC), the market leader, made a net profit of Tk 1.637 billion with EPS of 27.28 Tk in the first three quarter of 2009 as compared to Tk. 1.125 billion and Tk. 18.77 respectively for the same period of previous year. It shows a leap in pretax profit by 140 per cent over US$15.4 million of 1998, or just in 10 years. Akij Group, the volume leader, became a serious challenger to BATC, early this decade. Dhaka Tobacco, a sister concern of Akij Group, sold more than Tk 18.00 billion in 2008.
Cigarette accounts for 30 per cent of total tobacco consumption. The tobacco industry is driven by non-filter biris and smokeless tobacco like gul, and jorda. Poor buyers account for 70 per cent of consumption. Dhaka Tobacco Industry and Akij Tobacco Company are the biri market leaders. Popular among insolvent consumers biri accounts for 75 per cent of the market.
Bangladesh's cigarette industry growing at 3 per cent a year caters to consumers of different tastes and product price. Akij Group exports some tobacco to the Gulf and South East Asia for expatriate Bangladeshis.
Farmers who grow and cure tobacco, yet has little voice as the tobacco companies trap them with hypothetication. The companies arrange their bank loans for agriculture side by side with tobacco seeds, fertilisers, polythene bags and pesticides. Farmers are often attracted by a ready market for the cash crop. Tobacco companies support a farmer so long his land gives good yield. Tobacco is grown on 61,000 hectares of land, 0.7 per cent of the country's arable land by more than 200,000 farmers employing 10 million labourers. Women, children and other members of the families of the growers are exposed to chemical fertilisers and pesticides. Every year 75,000 people die due to tobacco consumption and handling. The indirect cost of tobacco is estimated at $652.86 million. The causes include loss of income from death or disability due to tobacco-related illnesses. The extra burden includes health care costs, lose of productivity and ailments caused by smoking and passive smoking.
A close scrutiny of the supply and demand sides shows that taxation alone cannot be an effective measure to curb tobacco consumption. It took the US 33 years, beginning 1965 to curb consumption of tobacco by 35 per cent. The US doubled federal tobacco tax over 20 years. Ban on ads and other moves also helped the US to achieve it.
Tobacco consumption is more prevalent among the poor and uneducated. The young population responds more to price measures.
As age increases, tobacco consumers become more price-inelastic.
Upper income smokers are reluctant to consumption. The lower-income consumers are more price elastic. This apparently tends to decrease the regressivity of tobacco taxation relative to standard measures. The elasticity of demand among the lowest-income consumers is much higher than among high-income consumers.
The price elasticity of demand falls with rising age and income. A young adult, influenced by promotion tactics, starts consumption making them psychologically dependent on tobacco. As they do not earn much, they easily respond to higher post-tax price.
A suitable mix of supply and demand side interventions alone can possibly curb tobacco consumption.
Now, a great deal of revenue comes from tobacco tax. Tax evasion by biri industry is partly attributed to socio-economic structure. Women and street boys are employed by biri industry as they work for low wages. The industry, located in the remote places neither brand product nor pay the taxes.
For health and revenue reasons, the National Board of Revenue policy encourages switching to higher or premium brands of tobacco products. Obviously, the government tries to narrow the price gap between hand made biri and cigarettes. Strong advocacy groups favour biri consumers because the poor cannot afford even low priced cigarettes. But the gap cannot be narrowed suddenly to prevent the possibility of smuggling.
due to a negative correlation between cigarettes and biri tax revenue taxing biri should have a switch over effect.
Over the last ten years, the National Board of Revenue made aggressive efforts to contain and reduce tobacco affordability. Domestic production stopped smuggling of Benson and Hedges and State Express 555 in late 1990s. From 2000, NBR gradually increased excise duty on biri from 25 Taka to 30 Taka per thousand. In 2004, it introduced 15 per cent VAT on biri replacing excise duty. A 17.5 per cent supplementary duty was imposed. In 2008, the supplementary duty on biri was increased to 20 per cent. As a result the total tax per thousand biris reached 48 Taka, almost a 100 per cent increase in eight years. Simultaneously, NBR has been gradually withdrawing supplementary tax on low brand cigarettes to encourage the switch over. Moreover, NBR also imposed 15 per cent VAT and 10 per cent supplementary duty on widely consumed chewing tobacco from 1998.
The NBR faces the challenge of making tobacco unaffordable. A simultaneous and adequate structural, administrative and legal reforms alone can combat tax evasion and smuggling. Comprehensive measures will reduce the customer base of tobacco industry. Excise duty on all forms of tobacco consumption and other socially and economically undesirable products could be effective. The poor tobacco consumers could be compensated in two ways. A portion of tobacco tax could be spent to encourage poor tobacco consumers to quit. The fund could be spent to support consumers who want to quit.
Possible impact of loss of income tax from the tobacco industry should be studied for discouraging production.
The demand-driven market calls for containing distribution, promotion and sales.
A mix of demand and supply side interventions could cut tobacco consumption.
(The writer is a senior manager, NBR, and adjunct faculty, Business Administration, Shanto-Mariom University of Creative Technology, Dhaka)
Can taxation the most effective price measure on the demand side interventions, curb consumption? And can it create a tobacco free environment? Or, the supply side intervention could be utilised to better control tobacco consumption.
Bangladesh is one of the most profitable tobacco markets in the world, with annual sales of around one billion dollars. According to industry data, prevalence of tobacco use is increasing among women. Of the total adult population 36 per cent smoke, 19.7 per cent consume tobacco in other forms. The prevalence of smoking among adult males is estimated at 46.8 per cent and among adult females at 25.4 per cent. In Asia 9 per cent women smoke. In smokeless tobacco consumption, adult women, accounting for 24.4 per cent outnumber adult men, accounting for 14.8 per cent. Of the young population in the 13-15 age group, 6.9 per cent consume tobacco products and 2 per cent of them smoke. Recent increase in women smokers is attributed to marketing tactics of the tobacco industry. Bangladesh's one billion dollar tobacco industry targets women as potential consumers.
An oligopoly, the industry serves a vertically integrated market. The fragmented structure of the market provides producers commanding power. Bangladesh's sellers' market provides the tobacco industry an extra advantage. British American Tobacco Company (BATC), the market leader, made a net profit of Tk 1.637 billion with EPS of 27.28 Tk in the first three quarter of 2009 as compared to Tk. 1.125 billion and Tk. 18.77 respectively for the same period of previous year. It shows a leap in pretax profit by 140 per cent over US$15.4 million of 1998, or just in 10 years. Akij Group, the volume leader, became a serious challenger to BATC, early this decade. Dhaka Tobacco, a sister concern of Akij Group, sold more than Tk 18.00 billion in 2008.
Cigarette accounts for 30 per cent of total tobacco consumption. The tobacco industry is driven by non-filter biris and smokeless tobacco like gul, and jorda. Poor buyers account for 70 per cent of consumption. Dhaka Tobacco Industry and Akij Tobacco Company are the biri market leaders. Popular among insolvent consumers biri accounts for 75 per cent of the market.
Bangladesh's cigarette industry growing at 3 per cent a year caters to consumers of different tastes and product price. Akij Group exports some tobacco to the Gulf and South East Asia for expatriate Bangladeshis.
Farmers who grow and cure tobacco, yet has little voice as the tobacco companies trap them with hypothetication. The companies arrange their bank loans for agriculture side by side with tobacco seeds, fertilisers, polythene bags and pesticides. Farmers are often attracted by a ready market for the cash crop. Tobacco companies support a farmer so long his land gives good yield. Tobacco is grown on 61,000 hectares of land, 0.7 per cent of the country's arable land by more than 200,000 farmers employing 10 million labourers. Women, children and other members of the families of the growers are exposed to chemical fertilisers and pesticides. Every year 75,000 people die due to tobacco consumption and handling. The indirect cost of tobacco is estimated at $652.86 million. The causes include loss of income from death or disability due to tobacco-related illnesses. The extra burden includes health care costs, lose of productivity and ailments caused by smoking and passive smoking.
A close scrutiny of the supply and demand sides shows that taxation alone cannot be an effective measure to curb tobacco consumption. It took the US 33 years, beginning 1965 to curb consumption of tobacco by 35 per cent. The US doubled federal tobacco tax over 20 years. Ban on ads and other moves also helped the US to achieve it.
Tobacco consumption is more prevalent among the poor and uneducated. The young population responds more to price measures.
As age increases, tobacco consumers become more price-inelastic.
Upper income smokers are reluctant to consumption. The lower-income consumers are more price elastic. This apparently tends to decrease the regressivity of tobacco taxation relative to standard measures. The elasticity of demand among the lowest-income consumers is much higher than among high-income consumers.
The price elasticity of demand falls with rising age and income. A young adult, influenced by promotion tactics, starts consumption making them psychologically dependent on tobacco. As they do not earn much, they easily respond to higher post-tax price.
A suitable mix of supply and demand side interventions alone can possibly curb tobacco consumption.
Now, a great deal of revenue comes from tobacco tax. Tax evasion by biri industry is partly attributed to socio-economic structure. Women and street boys are employed by biri industry as they work for low wages. The industry, located in the remote places neither brand product nor pay the taxes.
For health and revenue reasons, the National Board of Revenue policy encourages switching to higher or premium brands of tobacco products. Obviously, the government tries to narrow the price gap between hand made biri and cigarettes. Strong advocacy groups favour biri consumers because the poor cannot afford even low priced cigarettes. But the gap cannot be narrowed suddenly to prevent the possibility of smuggling.
due to a negative correlation between cigarettes and biri tax revenue taxing biri should have a switch over effect.
Over the last ten years, the National Board of Revenue made aggressive efforts to contain and reduce tobacco affordability. Domestic production stopped smuggling of Benson and Hedges and State Express 555 in late 1990s. From 2000, NBR gradually increased excise duty on biri from 25 Taka to 30 Taka per thousand. In 2004, it introduced 15 per cent VAT on biri replacing excise duty. A 17.5 per cent supplementary duty was imposed. In 2008, the supplementary duty on biri was increased to 20 per cent. As a result the total tax per thousand biris reached 48 Taka, almost a 100 per cent increase in eight years. Simultaneously, NBR has been gradually withdrawing supplementary tax on low brand cigarettes to encourage the switch over. Moreover, NBR also imposed 15 per cent VAT and 10 per cent supplementary duty on widely consumed chewing tobacco from 1998.
The NBR faces the challenge of making tobacco unaffordable. A simultaneous and adequate structural, administrative and legal reforms alone can combat tax evasion and smuggling. Comprehensive measures will reduce the customer base of tobacco industry. Excise duty on all forms of tobacco consumption and other socially and economically undesirable products could be effective. The poor tobacco consumers could be compensated in two ways. A portion of tobacco tax could be spent to encourage poor tobacco consumers to quit. The fund could be spent to support consumers who want to quit.
Possible impact of loss of income tax from the tobacco industry should be studied for discouraging production.
The demand-driven market calls for containing distribution, promotion and sales.
A mix of demand and supply side interventions could cut tobacco consumption.
(The writer is a senior manager, NBR, and adjunct faculty, Business Administration, Shanto-Mariom University of Creative Technology, Dhaka)