Tobacco taxation: Meeting twin objectives
Thursday, 16 April 2009
FE Report
The government is in double jeopardy. It being a signatory to the Framework Convention on Tobacco Control (FCTC) has to discourage tobacco consumption. But while doing so it needs to generate enough resources from domestic sources to finance its revenue as well as development budgets and the tobacco industry remains to be biggest fetcher of money for the government.
In the fiscal 2007-08, the government's earning in the form of VAT and supplementary duty from the tobacco industry stood at Tk 45 billion and the earning projection for the current fiscal is Tk 50 billion.
The cigarette manufacturers alone generates 95 per cent of the revenue the government receives from the tobacco industry though the bidi industry, which twice the size of the cigarette industry in terms of consumption, contributes only 5.0 per cent of the revenue.
In the backdrop of intense pressure from some anti-tobacco campaigners, who are drawing finances from sources outside the country, the government, according to sources, might go for a hike in tax on tobacco industry in next fiscal.
Industry insiders feel that an increase in tax rate would not help the government much in attaining twin objectives of reducing cigarette consumption and, at the same time, fetching higher revenue. Rather, the government's revenue earning may decline in the event of a tax rate hike.
In the fiscal year, 2003-04 and 2004-05, tax incidence was increased. But the move resulted in a decline in revenue earning. Later the National Board of Revenue (NBR) raised the price levels of different slabs of cigarettes which paid dividend. Under the price-slab system, any increase in cigarette prices is largely passed on to the consumers, creating a disincentive for the smokers. Moreover, the propensity among the cigarette manufacturers to evade tax goes up in the event of any increase in tax rates.
Sources claimed that the government could earn much more revenue if it raised the slabs of the low-priced cigarettes that are consumed at the mass level.
Similarly, the government's revenue earning from the bidi industry is well below its actual potentials. The size of the revenue that the government earns from bidi industry can be increased manifold through proper monitoring of VAT collection.
The government is in double jeopardy. It being a signatory to the Framework Convention on Tobacco Control (FCTC) has to discourage tobacco consumption. But while doing so it needs to generate enough resources from domestic sources to finance its revenue as well as development budgets and the tobacco industry remains to be biggest fetcher of money for the government.
In the fiscal 2007-08, the government's earning in the form of VAT and supplementary duty from the tobacco industry stood at Tk 45 billion and the earning projection for the current fiscal is Tk 50 billion.
The cigarette manufacturers alone generates 95 per cent of the revenue the government receives from the tobacco industry though the bidi industry, which twice the size of the cigarette industry in terms of consumption, contributes only 5.0 per cent of the revenue.
In the backdrop of intense pressure from some anti-tobacco campaigners, who are drawing finances from sources outside the country, the government, according to sources, might go for a hike in tax on tobacco industry in next fiscal.
Industry insiders feel that an increase in tax rate would not help the government much in attaining twin objectives of reducing cigarette consumption and, at the same time, fetching higher revenue. Rather, the government's revenue earning may decline in the event of a tax rate hike.
In the fiscal year, 2003-04 and 2004-05, tax incidence was increased. But the move resulted in a decline in revenue earning. Later the National Board of Revenue (NBR) raised the price levels of different slabs of cigarettes which paid dividend. Under the price-slab system, any increase in cigarette prices is largely passed on to the consumers, creating a disincentive for the smokers. Moreover, the propensity among the cigarette manufacturers to evade tax goes up in the event of any increase in tax rates.
Sources claimed that the government could earn much more revenue if it raised the slabs of the low-priced cigarettes that are consumed at the mass level.
Similarly, the government's revenue earning from the bidi industry is well below its actual potentials. The size of the revenue that the government earns from bidi industry can be increased manifold through proper monitoring of VAT collection.