Getting cigarette sector taxes right in this year’s budget

In a few weeks from now, Finance Minister Amir Khosru Mahmud Chowdhury will lay down Bangladesh’s 54th National Budget. The first since the BNP returned to power.

It is a critical one for the new Government.

Although the economy has grown significantly in size, the Government’s fiscal capacity has not strengthened at a similar pace. The Finance Minister has the unenviable task of funding extra public sector investments and facilitating economic growth in the face of rising debt, weak revenue mobilisation and institutional constraints.

Against this challenging background, such is the dependence on the country’s largest source of government revenues – the cigarette sector – that it must be handled carefully in the budget.

Cigarette sector taxes – including supplementary duties, VAT and the health development surcharge – make up almost a tenth of the country’s fiscal revenues. Even more when you count corporation taxes, personal income taxes, and dividend payments also remitted to the Government from the sector.

The problem is that the legal cigarette industry is in worse shape today than it has been in many years.

After accounting for 83% of the price of every cigarette sold that goes to the Government in taxes, what’s left to cover costs and reinvest in the business is lower in Bangladesh than it is anywhere else in the world, based on information from the World Health Organization’s Global Health Observatory database. After years of successive tax rate increases, and prices kept artificially low by the country’s archaic and excessively complicated tax system, it has become increasingly difficult to operate a commercially viable legal cigarette company in Bangladesh. This makes it even harder for international companies to justify further investments in the country, which would fuel future economic growth and employment.

And after the previous Government’s massive 20% increase in the minimum price – which was accompanied by a further increase in the tax rate – the consumption of tax-paid cigarettes plummeted from over 80 billion a year to less than 65 billion, as many smokers simply could not afford the higher prices. That is a massive – and alarmingly rapid – erosion of the tax base in only a year or two.
Worse still, the price and tax hikes didn’t deliver the tax revenue growth that’s both much needed and that was expected. While nominal excise receipts have risen, once adjusted for inflation – the metric that actually matters for fiscal planning – revenues have effectively stopped growing. Tax revenues this year are expected to be lower, in real terms, than they were in FY 2023-24 before the January 2025 budget was laid down.

In short, the industry responsible for contributing the biggest – by far – portion of the country’s fiscal revenues is struggling to make ends meet. The tax base is down by almost a quarter in over the last one to two years. And the system has manifestly failed to deliver any meaningful tax revenue growth for many years now. The system has, frankly, reached the limits of what it can deliver.
It’s no wonder, then, that the legal cigarette industry is extremely worried about the mistakes made in January 2025 being repeated this summer.

The answer is not to keep repeating past mistakes of the old regime. Bangladesh’s current cigarette tax system is no longer capable of generating sustainable revenue growth.

Continuing as before is not an option.

To build a sustainable, revenue generating excise model, Bangladesh needs a clear and sequenced long-term strategy to fundamentally reform the cigarette tax system. This has to include several key ingredients: narrow the price gap between the cheapest and most expensive cigarettes; simplify the tier structure; replace the ad valorem excise with a specific, per unit tax; and reduce the disparity between machine made cigarettes and handmade biris.

Firstly, there remains scope to increase cigarette prices in ways that will lift government revenues. But this must be done carefully. Steady, predictable increases, not sudden shocks, are what will protect both revenue and economic stability.

Secondly, the minimum retail prices of cigarettes need to rise more quickly in the lower tiers than in the higher ones. This may seem counterintuitive, but it really is simple mathematics. Roughly 90% of taxed cigarettes sold in Bangladesh fall within the two lowest tiers. Without raising prices and taxes on these products, it is mathematically impossible to generate meaningful revenue growth.

This challenge is compounded by a widening price gap between the least and most expensive cigarettes. That gap has encouraged downtrading, with consumers moving from higher taxed, higher priced brands to cheaper ones. This trend erodes government revenues year after year. Narrowing – and ultimately closing – this gap is imperative to restoring long-term future tax revenue stability.

Thirdly, Bangladesh urgently needs to move away from its percentage based ad valorem system and adopt a straightforward, unit based specific excise.

With total tax incidence already at 83%, percentage based increases simply no longer work. The system is stretched to its limits. Manufacturers have too little margin to absorb cost increases, creating incentives for tax evasion and illicit trade, which threatens revenue collection. A specific excise system would dramatically simplify administration, improve transparency and make government revenues far more predictable.

If Bangladesh can deliver these reforms – gradually, coherently and transparently – it will be well positioned to grow excise revenues, attract foreign investment, protect legal economic activity and support the country’s long term economic ambitions. In stark contrast, there is every reason to expect a massive cigarette price hike that consumers can’t afford will have the same results as before; further erosion of legal tax-paid volumes, an even weaker legal industry, and no government revenue growth to compensate.

Aesop’s fable ‘The Goose That Laid the Golden Eggs’ warned against greed and short-sightedness. The story warns against impatience and urges appreciation for steady, consistent rewards rather than seeking instant, massive wealth. It teaches that excessive desire for more can lead a person to lose the valuable assets they already possess.

It is a salutary lesson that, more than 2,500 years after Aesop told his story, the authorities would do well to consider when finalising his forthcoming Budget. Short-termism should be avoided; if it didn’t work in January 2025, there is no reason to believe it will work today.
The opportunity is significant. What is needed now is a clear commitment to modernisation and the discipline to see it through.

The writer is Simon Trussler, Group Head of Fiscal Affairs & International Trade, BAT.