Study flags 'structural limit' in tobacco tax system

A new report by Policy Exchange Bangladesh has warned that the country's tobacco taxation system has reached its "structural limit", calling for urgent reforms to prevent a potential plateau in revenue collection.
The study report, titled 'Optimizing tobacco taxation system for greater revenue collection in Bangladesh', finds that the long-standing ad valorem tax structure is showing signs of "revenue fatigue", where higher tax rates are yielding diminishing returns.
Hasnat Alam, economist and senior manager at Policy Exchange Bangladesh, presented the report at a workshop held at the Economic Reporters Forum (ERF) auditorium on Tuesday.
ERF President Doulot Akter Mala presided over the event, while General Secretary Abul Kashem moderated the session.
According to the study, the existing four-tier tax system -- based on a percentage of retail prices -- is increasingly vulnerable to "down-trading", as consumers increasingly shift to cheaper brands, alongside a rise in illicit trade.
Citing recent trends, Mr Alam said a major price and duty hike in January 2025 resulted in only a 5 per cent increase in revenue, compared to a 17 per cent rise following similar measures in 2015.
To address this issue, the report recommends transitioning to a fully specific excise system, where taxes are levied on the quantity of cigarettes rather than a percentage of price.
Such a system, it says, would ensure more predictable revenue, simplify tax administration and support public health objectives by discouraging consumption.
The study also suggests gradually reducing the number of tax tiers to narrow price gaps and limit incentives for consumers switching to lower-taxed products.
It further recommends automatic annual tax adjustments linked to inflation or income growth to maintain the real value of taxes.
As an interim measure, the report proposes adopting a mixed system with a strong specific tax floor if an immediate transition is not feasible.
Based on two decades of data, the study estimates that a fully specific excise regime could generate an additional Tk 226.54 billion in revenue over the next 10 years, while reducing tobacco consumption by 8.6 per cent.
A mixed system could yield Tk 40.31 billion in additional revenue and cut consumption by 6.4 per cent, said Mr Alam.
The report also underscores the need for stronger enforcement through digitalisation, including the introduction of digital tax stamps for real-time production tracking and centralised reporting under a single National Board of Revenue (NBR) commissionerate.
It further recommends establishing a dedicated tax monitoring unit to support evidence-based policymaking and safeguard revenue.
With tobacco taxes accounting for around 9 per cent of total revenue, the report cautions that further rate hikes alone may not ensure sustainable gains without comprehensive structural reforms.

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