Bangladesh losing billions in tobacco revenue despite raising cigarette taxes in budget

The firms go on a sales spree to the dealers and retailers just before the government raises the prices in budget

It has been almost one and a half months since the government raised cigarette prices in the national budget, but it is not raking in extra revenue because of a clever strategy taken by the tobacco companies.

They escalate their production before the budget and go on a sales spree. It is the time they pay the government all taxes.

But after the prices are raised, the same cigarettes are sold at higher prices, leading the government to miss out on the extra revenue for a few months.

A statistical analysis of this sector shows that the government could have earned Tk 2 billion more in one month alone.

An official at the National Board of Revenue, or NBR, said they were working to deal with the strategy of the companies. The official also said the Directorate of National Consumer Rights Protection, or DNCRP, was supposed to work on the issue.

The DNCRP admitted its 'responsibility' and said it could not carry out raids on cigarette companies because it was occupied with controlling the prices of essential goods.

The tobacco companies did not make comments.

HOW GOVERNMENT LOSES REVENUE

As per the law, cigarettes are a price-sensitive product. Since this type of goods sees an escalation in production and stock-up whenever the price rises, a new rate is always implemented immediately after a hike is proposed in the budget.

This means the tax and price increase of cigarettes was effective immediately after the finance minister proposed the 2024-25 budget on Jun 6. The tax was increased on all four qualities of cigarettes.

The retail price of 10 sticks of low-quality cigarettes rose to Tk 50 from Tk 45, and the subsidiary tax was increased from 58 percent to 60 percent in the budget. This pushed up the tax to 76 percent from 74 percent. The 15 percent VAT and 1 percent health surcharge remained the same as before.

For the mid-quality cigarettes, the price of 10 sticks rose to Tk 70 from Tk 67, for high-quality ones from Tk 113 to 120 and for the premium quality, the price of 10 sticks increased from Tk 150 to Tk 160.

For the top three qualities, the subsidiary tax was increased from Tk 65 to Tk 66. The 15 percent VAT and 1 percent health surcharge remained the same as before.

As per the rules, the cigarette companies should put a price tag on cigarette packets higher than the price fixed by the government. The tax will be applied to the price mentioned on the packet. But this is not happening.

In different parts of the capital, the retail price of a 20-stick packet of premium quality cigarettes Benson & Hedges and Marlboro packets remained printed at Tk 310 like it was before the budget announcement. But retail sellers are charging Tk 324-325 for a packet.

According to the law, the retail price should be printed Tk 324 or 325 after the budget was passed. Since it was not printed, the consumers were paying extra but the government missed the extra revenue.

Earlier, the government used to get Tk 251.10 in revenue as per 81 percent tax. At the current price, the government should have Tk 265.68 in revenue but it is getting the same amount as before since the new retail price is not printed on the packet.

The retail price for a 20-stick packet of low-quality cigarettes like Derby, Hollywood and Meriss is still printed at Tk 90. The government got Tk 65.12 in revenue at a 74 percent rate. The same packet, however, is being sold at Tk 120 after the budget.

The government should have received Tk 76 in revenue but the extra money is going to the seller, dealer or the company.

The new price fix by the government and new tax added to the previous price shows that tax for the high-quality cigarette should rise a minimum of 7.5 percent and for the mid-quality 4.5 percent.

HOW MUCH IS THE REVENUE LOSS?

British-American Tobacco Bangladesh Company, or BATBC, holds the lion's share of the tobacco market in Bangladesh, followed by Japan Tobacco International and Abul Khair Tobacco Company Limited. All these companies together are selling more than 50 brands of cigarettes in older packets but at a higher price.

For instance, a review of the BATBC revenue from January to May shows that the company pays around Tk 35 billion in revenue every month.

All other companies pay 20-25 percent of the total revenue. This means other companies provide Tk 8 billion to 9 billion to the national treasury as revenue per month.

Although the price hike and extra tax should push up the revenue by 5 percent, the government loses Tk 2 million as the new price is not mentioned on the cigarette packet.

For BATBC, the figure increased every month after March.

The company paid Tk 33.72 billion in revenue in March, Tk 34.19 billion in April and Tk 37.39 billion in May.

If this trend continues, the amount of revenue loss for the government will become larger.

There is another reason to analyse the data from these three months. The price of cigarettes tends to rise in every budget.

The companies produce cigarettes above the market demand only to pay taxes at the previous rate.

It is evident in revenue analysis as well that the BATBC paid an average of Tk 23.68 billion in revenue in the first six months of the last fiscal year. That is, around Tk 10 billion less than the last five months.

That year, the revenue payment dropped to Tk 0.77 billion in the following month the budget was passed. This shows that companies keep more cigarette supply than demand in the market and do not supply new products to the market two to three months after the budget.

BATBC produced more than 71.19 billion cigarettes in 2023, according to its annual report. The figure was 63.87 billion in the previous year. This shows that production increased by 11 percent and their earnings by 9 percent.

Hence, around a 10 percent rise in revenue is expected when the new tax rate is applied.

The government’s revenue loss will be more if Japan Tobacco International and Abul Khair Tobacco International's details are taken into account. Both companies hold a major market for mid-quality and low-quality cigarettes.

As the BATBC is listed on the Dhaka Stock Exchange or DSE, its annual income expenses and revenue payment details are easily known. Meanwhile, the other companies are yet to get listed and do not share their account details.

NO STATEMENT FROM THE COMPANIES

When contacted, the communication department of BATB asked for an email with detailed questions. After the mail was sent last Saturday, they asked for a day to answer.

They did not send any statement on Sunday but a public relations agency working on their behalf contacted and sought another day to give the statement. They also requested not to publish the report until then.

On Monday, the PR agency contacted and said as BAT is a multinational company, the local branch was not allowed to provide an institutional statement. Another day was needed to get the answers from their global office in London.

However, there was no statement from the BAT global office or the PR agency on Tuesday.

Japan Tobacco International’s communication department also asked for written questions when contacted and also sought a day to answer them.

The company, however, did not respond after a day and no one was available over the phone.

bdnews24.com contacted the communication department in Abul Khair Group to talk to Abul Khair Tobacco Company Limited, but they said there was no communication department in the tobacco company. Also, no one from the group was allowed to speak, they said.

NBR SAYS DNCRP RESPONSIBLE

Cigarettes are not like other products. If the government tries to collect revenue at the consumer level, more of it will be evaded, said NBR Second Secretary Md Badruzzaman Munshi. “This is why the government collects cigarette taxes after production and before they hit the market,” he said.

“We got VAT and tax based on the prices mentioned in the packets. Now if someone sells the old packets at a higher price, we can’t do anything about it. This should be taken care of by the Directorate of National Consumer Rights Protection.”

He said that to reduce this tax evasion tendency, the government was working on overhauling the tax rate system. “We hope this trend will reduce in future.”

AHM Shafiquzzaman, the director general of the DNCRP, admitted that cigarette companies produced extra cigarettes three to four months before the budget was passed. They pay the tax as per the old rate and stock the cigarettes. “After the budget is passed, they sell the old cigarettes at a higher price and the government loses billions in revenue,” he said.

“The problem is everyone says the DNCRP should monitor it. But we work more with the essentials and can’t look after this issue.”

He said the directorate wanted to run drives against cigarettes in the last one and a half years but was busy monitoring and keeping the quality and prices of eggs, edible oil, and other essentials under control.

[Writing in English by Sabrina Karim Murshed: editing by Osham-ul-Sufian Talukder]