Sustainable Revenue Requires Structural Reform
Arafat Jaigirdar
Sustainable public finance depends not only on how much revenue a government seeks to raise, but also on how that revenue is collected. Well-designed tax systems balance ambition with realism: they generate predictable income for the state while remaining administratively enforceable and economically viable for compliant businesses. When that balance is lost, higher rates do not necessarily translate into higher collections. Instead, they can weaken compliance, shrink formal activity and undermine the very revenue objectives they aim to achieve.
This challenge is particularly relevant for economies that rely heavily on indirect taxation. While indirect taxes are relatively easier to administer and collect, excessive dependence on them reduces fiscal flexibility and increases vulnerability to market distortions. Over time, tax structures that do not adequately account for consumer behavior, enforcement capacity and cost realities can become counterproductive, especially when rates continue to rise without corresponding structural reform.
The stakes are high. Today, the tobacco sector contributes close to 10 percent of Bangladesh’s total tax revenue, generating more than Tk 40,000 crore annually for the national exchequer. Few individual industries play such a significant role in financing public expenditure.
Bangladesh’s experience in recent years offers a clear illustration of this dynamic. One of the country’s most important revenue-generating sectors currently operates under an effective tax burden of 83 percent of the maximum retail price, combining supplementary duty, VAT and the health development surcharge. This leaves only 17 percent of the price for manufacturers to cover all operational costs. Any remaining profit is then subject to an additional 47.5 percent corporate tax. Sustaining compliant operations under such constraints is increasingly difficult, particularly in a market where enforcement capacity remains limited. An 83% effective tax burden is not just high; it is structurally destabilizing.
The fiscal consequences are already visible. Despite repeated tax increases, revenue growth from this sector where double-digit revenue growth is considered to be a norm, expanded by only around 5 percent in last fiscal year. This slowdown is not simply the result of declining demand. Rather, it reflects a growing shift of volume from the formal market to illicit channels that operate entirely outside the tax net.
Recent research by Insight Metrics indicates that more than 13 percent of products consumed in this segment are now illegal, representing a year-on-year increase of over 30 percent. An estimated 830 million illicit cigarettes enter the market every month, causing annual revenue losses conservatively estimated between Tk 4,000 to Tk 10,000 crore. These products are no longer confined to isolated border routes or informal markets; they are widely available across urban centers, rural areas and increasingly through online platforms. The illicit market is no longer a leakage; it is becoming a parallel industry.
Notably, this expansion is occurring despite intensified enforcement efforts by law enforcement authorities. In 2025 alone, authorities conducted a significantly higher number of nationwide operations compared to previous years, seizing hundreds of millions of illegal cigarettes and counterfeit tax stamps. The value of attempted revenue evasion detected this year exceeded Tk 260 crore. Yet illicit market share continues to rise. This points to a need for reform which will bring positive results in the long term.
The situation is further complicated by institutional fragmentation. Responsibility for controlling illicit cigarettes is spread across multiple agencies, including the National Board of Revenue, law enforcement bodies, regulators overseeing digital platforms, and public health authorities. In the digital space in particular, legal and technical constraints make proactive intervention difficult. When tax policy does not take into account enforcement capacity and institutional coordination, revenue leakage becomes increasingly difficult to contain.
International experience suggests that this is not an isolated phenomenon. Many countries, including Singapore, Vietnam, Sri Lanka and several European nations, have transitioned away from heavily ad-valorem tax systems toward more specific taxation structures. This shift was driven not by a desire to reduce overall tax burdens, but by the recognition that ad-valorem systems become progressively less effective at very high rates, particularly in developing economies with constrained enforcement capabilities.
For Bangladesh, the policy question is therefore not whether tobacco should be taxed heavily – it already is – but whether the current structure can continue to deliver sustainable revenue growth. Persisting with a framework that compresses the formal market while expanding the illicit sector risks eroding both fiscal returns and regulatory control.
Addressing this challenge requires thoughtful and inclusive reform. A more balanced and predictable tax framework, one that reflects inflation, income growth and administrative capacity, would help sustain participation in the formal market while still meeting revenue goals. Equally important is the introduction of a structured, industry-specific stakeholder dialogue that brings all affected supply chain actors into the policymaking process. Engaging stakeholders before major fiscal or pricing measures are adopted enables policymakers to anticipate unintended consequences and avoid the types of disruptions seen in other jurisdictions where abrupt, non-consultative reforms have fueled sharp rises in illicit trade.
International precedents underline this risk. In Malaysia, a sharp tobacco tax increase in 2015 was followed by a sustained surge in the illicit cigarette market, now estimated to account for about 55 % of total sales and to cost the government more in potential revenue than it collects in legal excise. In Australia, official assessments indicate that roughly half of all tobacco consumed in 2024–25 was illicit, resulting in billions in evaded revenue despite intensified enforcement efforts.
Broader efforts to strengthen compliance across underperforming sectors remain essential. Bangladesh’s tax-to-GDP ratio is low by international standard, places disproportionate pressure on a small number of already compliant industries. Modernizing digital compliance architecture, bringing all registered tobacco companies under the Large Taxpayer Unit (LTU) to enable centralized data driven oversight, expanding the LTU framework to other high-impact sectors, and enhancing inter-agency coordination would meaningfully widen the tax base. These reforms can unlock significant revenue potential while reducing over dependence on industries that are already heavily taxed, creating a more equitable, sustainable, and resilient fiscal structure.
Ultimately, sustainable revenue growth and genuine win-win outcomes depend on policies grounded in economic realism and administrative practicality. When tax adjustment is aligned with enforcement capacity and actual market behavior, governments are better positioned to safeguard revenue, maintain regulatory control and support long-term economic stability. Gradual well-sequenced structural reform, developed through collaboration rather than unilateral change, offers the most a pragmatic pathway to achieving these objectives.
Writer : Head of External Engagement, BAT Bangladesh