Pricing and Taxation of Tobacco Products

in BangladeshFindings from Wave 1 (2009) and Wave 2 (2010)

of the ITC Bangladesh Survey

May 11, 2011 Nigar Nargis, Ummul Hasanath Ruthbah, aKM Ghulam Hussain, and SM ashiquzzaman

University of Dhaka, Bangladesh

Geoffrey T. Fong University of Waterloo and

Ontario Institute for Cancer Research, Canada

Iftekharul Huq East West University, Bangladesh

Suggested Citation: Nargis, N., Ruthbah, U. H., Hussain, A. K. M. Ghulam, Ashiquzzaman, S. M., Fong, G. T., and Huq, I. (May 2011). Pricing and Taxation of Tobacco Products in Bangladesh: Findings from Wave 1 (2009) and Wave 2 (2010) of the ITC Bangladesh Survey. ITC Project Working Paper Series. University of Waterloo, Waterloo, Ontario, Canada.

The International Tobacco Control Policy Evaluation ProjectITC PRojeCT WoRKING PaPeR SeRIeS

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PricingandTaxationofTobaccoProductsinBangladesh:FindingsfromWave1(2009)andWave2(2010)oftheITCBangladeshSurveyNigarNargis1,UmmulHasanathRuthbah1,AKMGhulamHussain1,SMAshiquzzaman1,GeoffreyT.Fong2,3,andIftekharulHuq4

1DepartmentofEconomics,UniversityofDhaka,Bangladesh,2DepartmentofPsychology,UniversityofWaterloo,Canada,3OntarioInstituteforCancerResearch,Canada,4DepartmentofEconomics,EastWestUniversity,Bangladesh

IntroductionIncreasingtaxesandpricesisrecognizedworldwideasthesinglemostcost‐effectivemeasureoftobaccocontrolandacriticalcomponentofacomprehensivetobaccocontrolstrategy.Article6oftheWHOFrameworkConventiononTobaccoControl(FCTC)obligatescountriesthathaveratifiedthetreatytoadoptpricingandtaxationmeasuresinordertoreducetobaccoconsumption.

Whiletheurgencyoftobaccocontroliswellacceptedworldwide,theuseoftaxationoftobaccoproductsasameanstocontroltobaccouseissubjecttodebatefrompolitical,economic,andsocialpointsofview.Suchadebatearisesfromthefactthatapolicychangeintendedforbenefittingsomepeopleoftendoesnotcomewithoutcost.Ontheonehand,increasedtaxesontobaccocanyieldsignificanthealthbenefittoitsusersbycuttingdowntobaccoconsumption.Ontheotherhand,shrinkingoftobaccocultivationandmanufacturingsectorfromreduceddemandfortobaccousemayresultinlossofemploymentinthissector.Fromasocialplanner’spointofview,thisisadilemmaofemployingtobaccotaxes.Thesimpledecisionruleisthattobaccotaxesaretoberaisedaslongasthenetgain,thatisthehealthbenefitlesstheemploymentcost,ispositive.TheWHO2004‐05studyonthecostoftobacco‐relatedillnessesshowedthatthisisindeedthecaseinBangladesh.Tobaccousagecausedannuallyabout57,000prematuredeathsandabout400,000casesofdisabilityofadults30yearsandolderandimposednetcostof26.1billionTakain2004,whichwasequivalentto1%oftheGDPofthatyear.1

1 World Health Organization. Impact of Tobacco-Related Illnesses in Bangladesh. World Health Organization, South East Asia Region, New Delhi, India, 2007.

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ThefirstwaveoftheITCBangladeshSurvey,conductedin2009,showsthatoverallsmokingprevalenceincreasedfrom20.9%in2004‐05to22.0%in2009,2with42.0%ofmales(20.2million)and1.3%offemales(0.6million)inBangladeshsmokingsomeformoftobacco.Thismeansthat,comparedto2004‐05,therewere2.5millionmoresmokersinBangladeshin2009.

Theincreaseinsmokelesstobaccouseamongmenandwomensince2004‐05isalsoalarming.TheWHOstudyestimatedthat14.8%ofmenand24.4%ofwomenweresmokelesstobaccousers.Butthe2009ITCBangladeshSurveyshowedthatnow27.6%ofmenand32.0%ofwomenaresmokelesstobaccousers.

Overall,thepercentageofBangladeshiswhouseanyformoftobacco(smoked,smokeless,orboth),increasedfrom36.8%in2004‐05to43.2%in2009.Thismeansthatcomparedto2004‐05,therearenow8.7millionmoretobaccousersinBangladesh.Ofthem,4.8millionaremenand3.9millionarewomen.By2009,approximately25.7millionmenand15.3millionwomenusedsomeformoftobaccoinBangladesh.Theenormousriseintobaccouseinthecountryportendsthegrowingspectreoftobacco‐causeddeathanddisabilityfarabovethefiguresestimatedin2004‐05.

Thegeneralmessageisclear:Bangladeshmustengagemoreurgentlyandforcefullyintobaccocontrolefforts.FCTCpoliciessuchasgraphicwarninglabelsandcomprehensivesmoke‐freelawshavenotbeenimplementedinBangladesh.InMay2011,theITCProjectissuedreportspresentingfindingsfromtwowavesoftheITCBangladeshSurveyontheverypooranddecliningeffectivenessofwarninglabels3andofthecontinuingveryhighlevelsoftobaccosmokeinpublicvenues,duetotheabsenceofmeaningfulsmoke‐freelaws.4ThethirdpolicydomaininwhichBangladeshmustactwithstrengthisintaxationandprice,whichisrecognizedasthemostimportantpolicydomainforreducingtobaccouse.

Inthispaper,wepresentthefindingsfromtheInternationalTobaccoControl(ITC)PolicyEvaluationSurveysandEnumerationconductedinBangladeshin2009and2010,whichprovideoverwhelmingevidenceoftheneedforraisingtobaccotaxesinBangladesh.TheresultsshowthataveragecigaretteandbidiconsumptioninBangladeshremainedunabatedbetween2009and2010,inresponsetothemoderatetaxchangesonthesetwoproducts.Theestimatesofpriceelasticityofdemandconfirmthatcigaretteandbidiconsumptioncouldbesignificantlyreducedbyincreasingtaxesontheseproducts.

2 ITC Project. ITC Bangladesh National Report. University of Waterloo, Waterloo, Ontario, Canada; University of Dhaka, Bangladesh, April 2010. 3 ITC Project. ITC Bangladesh Report on Tobacco Warning Labels. University of Waterloo, Ontario, Canada, and University of Dhaka, Bangladesh, May 2011. 4 ITC Project. ITC Bangladesh Report on Smoke-Free Policies. University of Waterloo, Ontario, Canada, and University of Dhaka, Bangladesh, May 2011.

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ITCBangladeshSurveyData

TheITCBangladeshProjectwascreatedtorigorouslyevaluatethepsychosocial,behavioural,economic,andpublichealtheffectsoftobaccocontrollegislationinBangladesh,usingmethodsthattheITCProjecthasemployedin19othercountriesinhabitedbyover50%oftheworld’spopulation,60%oftheworld’ssmokers,and70%oftheworld’stobaccousers(seewww.itcproject.org).TheoverallobjectiveoftheITCProjectistoprovideanevidencebasetoguidepoliciesenactedundertheFrameworkConventiononTobaccoControl(FCTC)andtosystematicallyevaluatetheeffectivenessoftheselegislativeefforts.

TheITCBangladeshSurveyisaface‐to‐facesurveyconductedbytrainedinterviewersfromtheBureauofEconomicResearch(BER)attheUniversityofDhaka,Bangladesh,incollaborationwiththeITCProjectattheUniversityofWaterlooinCanada.ThisprojectisfundedforthreesurveywavesbytheInternationalDevelopmentResearchCentre(IDRC),CanadawithadditionalfundingfromtheCanadianInstitutesofHealthResearch(CIHR).ThesurveyprotocolwasapprovedbytheEthicalReviewCommitteesoftheBangladeshMedicalResearchCouncilandbytheOfficeofResearchEthics,UniversityofWaterloo.

TheanalysesreportedinthispaperarebasedondatacollectedinWaves1and2ofthesurveyconductedinFebruarytoMay2009andMarchtoJune2010,respectively.TheWave1Surveyconsistedofanationallyrepresentativesampleof2,510adultsmokersand2,116adultnon‐smokersaged15yearsandolder.Theserespondentsformacohort,whowerere‐contactedtoanswerfollow‐upsurveysin2010andwillbere‐contactedin2011forthethirdwaveoftheITCBangladeshSurvey.

TheITCBangladeshWave1Surveyisanationallyrepresentativeprobabilitysampleoftobaccousersandnon‐usersselectedthroughamulti‐stageclusteredsamplingdesign(samplingwithprobabilityproportionaltopopulationsizeatthelevelsofdistrict,upazila/thana,andvillage/ward).Atotalof94,485adultsaged15andolderfrom31,689householdswereenumeratedtoestablishanaccuratesamplingframefromwhichsurveyparticipantswouldbedrawn.FortheNationalsample,23districtsoutofthe64districtscoveringBangladeshwereselected,20ofthemusingprobabilityproportionaltopopulationsize.Onedistrict,Satkhira,wasselectedtocoveronelandportthatisusedforcross‐bordertradeoftobaccoproducts.Twootherdistricts,NetrokonaandRangamati,wereselectedpurposivelytosurveythetribalcommunitiesofGaroandChakma.Atotalof40upazilasfromthe23districts,and2villagesfromeachupazilawereselected,againwithprobabilityproportionaltosize.Thus,atotalof80villages/wardswereselectedfortheNationalsample.Fortheanalysisinthepresentpaper,onlytheprobabilitysampleselectedfrom20districtshasbeenusedtomaketheestimatesnationallyrepresentative.In

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addition,ineachwave,about1200individualsarepurposivelyselectedfromslumareasinandaroundDhakacitytostudythetobaccousebehaviourofthefloatingpopulation.

Article6oftheFCTCandtobaccotaxationinBangladesh

Article6oftheWHOFrameworkConventiononTobaccoControlspecifiesthefollowingmeasuresrelatingtothereductionofdemandfortobaccothroughtaxation:

1.“ThePartiesrecognizethatpriceandtaxmeasuresareaneffectiveandimportantmeansofreducingtobaccoconsumptionbyvarioussegmentsofthepopulation,inparticularyoungpersons.”

2.“WithoutprejudicetothesovereignrightofthePartiestodetermineandestablishtheirtaxationpolicies,eachPartyshouldtakeaccountofitsnationalhealthobjectivesconcerningtobaccocontrolandadoptormaintain,asappropriate,measureswhichmayinclude:

(a)implementingtaxpoliciesand,whereappropriate,pricepolicies,ontobaccoproductssoastocontributetothehealthobjectivesaimedatreducingtobaccoconsumption;and

(b)prohibitingorrestricting,asappropriate,salestoand/orimportationsbyinternationaltravellersoftax‐andduty‐freetobaccoproducts.”

Duringtheperiodoftimebetweenthepassageofthe2005TobaccoControlActuntilWave2oftheITCBangladeshSurveyin2010,theBangladeshgovernmenttookanumberofinitiativesintobaccotaxation:

• Twoadjustmentsofthefourretailpriceslabsforthesupplementaryduty(SD)appliedataprogressiverateoncigarettesinadditionto15%valueaddedtax(VAT);

• IncreasingtheSDbyonepercentagepointateachpriceslabforcigarettes;• IncreasingtheSDonunfilteredbidisfrom17.5%to20%andto25%forfilteredbidis;• Imposinga15%VATand10%SDonsmokelesstobacco(zardaandgul);• Imposinga10%dutyontobaccoexports;• Requiringallcigarette,bidi,andsmokelesstobaccocompaniestopaycorporatetaxes.

DespitethesetaxmeasuresundertakenbytheNationalBoardofRevenue,tobaccoconsumptionremainedunabatedinBangladesh.DatafromWaves1and2oftheITCBangladeshSurveycollectedin2009and2010showsthatthereisampleroomtoimplementstrongerpricingandtaxationmeasurestoreducetobaccoconsumptionandprevalenceinBangladesh.

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Cigaretteandbiditaxes,prices,andconsumption

ThecurrentcigarettetaxinBangladeshiscomposedoftwocomponentscollectedattheproducerlevel:avalueaddedtax(VAT)attherateof15%,andasupplementaryduty(SD)thatvariesatdifferentpricerangesofcigarettepacksof10sticks.Between2009and2010,thepriceslabsforthefourtiersofcigarettepriceswereincreasedandtheSDforeachtierwasraisedbyonepercentagepointasshowninTable1.Theserangeofpriceslabsis,however,notcontinuous.Thegapsbetweensuccessivetiersareshownintherowundereachtierwithcorrespondingpercentageofsmokerswhoreportedpricesinthatrange.ForthepurposeofcalculationofaverageSD,weimputedthetaxrateforeachpricetiertothepricegapabovethattieruntilthelowerlimitofthenexthigherpricetier.

Afterweightingbythenumberofcigarettessmokedperdayasreportedbyindividualsmokers,wefindthataverageSDincreasedfrom38%in2009to45%in2010andaveragerealpriceofapackof10cigarettesincreasedfrom17.4to19.3Takain2009prices(seeTable2).TheaverageSDandcigarettepriceisdrivendownbytheconcentrationofsmokersinthelowesttwopricetiers—79.8%in2009and76.6%in2010.

Theincreaseincigarettepricesbetween2009and2010isreflectedintheupwardadjustmentofthepriceslabsby12to16%onthelowerlimitand5to10%ontheupperlimit.Partofthepriceincreasecanbeattributedtoincreasedtaxratesby1%pointin2010‐11overthe2009‐10rates.Ourestimateshowsthatonaveragethe1%pointincrementinSDresultedinanincreaseinpriceperpackof10cigarettesby0.80Taka.Itaccountedfor4.6%increasefromtheinitialpriceof17.4Takain2009,whilethetotalincreasewas11.2%.Morethanhalfofthepriceincrease(11.2%‐4.6%=6.6%)isattributedtotheincreasedprofitmarginofcigarettemanufacturersanddistributorsandtheincreasedcostofproduction.

Despitethispriceincrease,thenumberofcigarettessmokedperdayremainedalmostthesame—10.2sticksperdayin2009and10.5sticksperdayin2010(Table2).Duringthisperiod,GDPofBangladeshincreasedby6.2%,accordingtoestimatesfromtheWorldBank.ItislikelythatthenegativeeffectofamodestpriceincreaseoninelasticcigarettedemandwasmorethanoffsetbyastrongpositiveeffectofincomegrowthinBangladesh.

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Table1.2009­10Cigarettetaxesanddistributionofsmokersbypricetiers(weightedbyaveragedailycigaretteconsumption).

Yearof

observationCigarettePriceSlab

Pricetier(Taka) SD(%) %ofcigarettesmokers

Tier1: 7.25–8.75 32 10.1LOW 8.75–16.25 63.6Tier2: 16.25–17.25 52 0.0MEDIUM 17.25–23.25 6.1Tier3: 23.25–29.25 55 5.3HIGH 29.25–46.25 12.0

Wave1(2009)

PREMIUM

Tier4: 46.25+ 57 2.8

LOW Tier1: 8.40–9.15 33 10.0 9.15–18.40 32.9MEDIUM Tier2: 18.40–19.00 53 1.0 19.00–27.00 32.7HIGH Tier3: 27.00–32.00 56 14.7 32.00–52.00 7.6

Wave2(2010)

PREMIUM

Tier4: 52.00+ 58 1.1

Source:NationalBoardofRevenue,GovernmentofBangladesh.

Table2.2009­10Cigaretteandbidiprice,taxandconsumption.

Cigarette Bidi

2009 2010 2009 2010

Averagecigaretteprice(2009Takaperpackof10) 17.4 19.3 6.0 5.7

AverageSD(%) 37.9 45.1 20.0 20.0

VAT 15.0 15.0 15.0 15.0

AverageSDas%ofaverageprice 24.0 27.0 10.0 12.0

Numbersmokedperday 10.2 10.5 13.6 13.8Note:2010pricesarediscountedby8%toadjustforinflationduring2009‐2010.Source:ITCBangladeshSurvey,2009,2010.

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Theaveragerealpriceofbidis(weightedbythenumberofbidissmokedperday),ontheotherhand,decreasedfrom6.0to5.7Takaperpackof25sticks,whiletheSDonbidisdidnotchangeduringtheperiodof2009‐10.Thenumberofbidissmokedperdayalsoremainedaboutthesameat13.6stickperdayin2009and13.8sticksin2010(Table2).

TheminoreffectofincreasedSDoncigarettepriceandthefallinbidiprices,withalmostunalteredaverageconsumption,indicatesthattheBangladeshgovernmenthasyettogaincontrolovercigaretteandbidiprices,andthusisnotcontrollingtobaccoconsumption.AtthecurrentratesofSDoncigarettes,theshareofSDinthepurchasepricewasonaverage24%forcigarettesand10%forbidisin2009.In2010,thesesharesincreasedslightlyto27%and12%forcigaretteandbidirespectivelyandremainedfarbelowtherecommendedlevelof70%bytheWorldHealthOrganization.5ThuswefindthatthereisampleroomforincreasingSDonbothcigarettesandbidis.

Pricesensitivityofsmoking

Theassociationbetweencigaretteandbidipricesandconsumptionreportedabovedoesnottakeintoaccountfactorsotherthanpricethatcanaffectindividualconsumers’decisiontosmokeandthenumberofcigarettesorbidissmokedperday.Thisassociationcanthereforeconcealthetrueeffectofpricechangeoncigaretteandbididemands.InamultivariateanalysisofindividualleveldatapooledfromtheWave1householdenumeration,andWaves1and2oftheITCBangladeshSurveysconductedin2009and2010respectively,wecontrolledforthefollowing:

• individualdemographicandsocio‐economiccharacteristics(e.g.,age,maritalstatus,education,workstatus,householdsizeandincome,restrictionsonsmokingathomeandworkplace,andrural/urbanareaofresidence),

• numberofyearssinceinitiationofsmokingonaregularbasis(whichreflectsthedegreeofaddiction),and

• theyearofobservation(whichaccountsforoverallmacroeconomiceffectondemand).

Inconsiderationofthepossibilityofsimultaneouslychoosingquantityandpriceofcigarettesbysmokersandresultingendogeneityofprice,weuseaninstrumentalvariablemethodofestimationforthecigarettedemandfunction.WeusedratesofSDoncigarette,housingindexandupazila/thanaofresidenceasinstrumentstopredictcigaretteprice;thisinstrumentedpricevariablewasthenusedinthecigarettedemandequation.Sampling

5 World Health Organization. WHO Technical Manual on Tobacco Tax Administration. World Health Organization, 2010.

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weights,clusteringandstratificationofhouseholdsbysocio‐economicstatusweretakenintoaccountinusingsurveydataforestimation.Thismethodensuresnationalrepresentativenessoftheestimates.

Thepriceelasticityofthenumberofcigarettessmokedperdayisestimatedat‐0.22andthepriceelasticityofthedecisiontosmokecigarettesat‐0.44(seeTable3).Thetotalpriceelasticityofcigarettedemandisthusestimatedtobe‐0.66.Thismeansthatifcigarettepricedoubles,cigaretteconsumptionwillfallby66%.Theseresultsconfirmtheconventionalwisdomthatincreasesincigarettepricecansignificantlyreducecigarettesmokingprevalenceanddailyconsumptionamongsmokers.

Usinghousingindexforstratificationofrespondentsintolow,medium,andhighsocio‐economicstatus(SES),weestimategreaterpricesensitivityofdailycigaretteconsumptionandsmokingprevalenceamonglowerSESrespondents.Thetotalpriceelasticityvariesfrom‐0.76forlowSESto‐0.73formediumSESand‐0.59forhighSESrespondents.Onaverage,two‐thirdsofthispricesensitivityisaccountedforbythepriceresponsivenessofthedecisiontosmoke,indicatingtheenormousrolethatpriceincreasecanplayininducingquittingbehaviouramongcurrentsmokersanddiscouraginginitiationofsmokingbehaviouramongnon‐smokers.

Forestimatingthebididemandequation,theinstrumentalvariablemethodofestimationcannotbeappliedbecausethebiditaxratedidnotchangeduring2009‐2010,anexogenousvariationthatisessentialforidentificationofthebididemandequationfromthepriceequation.Weonlycontrolledforthepriceofbidisandhouseholdincomestatusofbidismokersduetolackofsufficientnumberofobservationstocontrolforalltheexplanatoryvariablesasspecifiedinthecigarettedemandfunction.Becausetheprevalenceofbidismokingisgreateramongthetribalandslumareas,weincludedthesepurposivesamplesintheestimationofbididemandfunctioninadditiontothenationallyrepresentativesample.

Theprevalenceofbidismokingisnotsignificantlyaffectedbythevariationinbidiprice,possiblybecausebidipriceistoolowtoinfluencepeople’sdecisiontoquitbidismokingorpreventinitiationofbidismoking.Theelasticityofthenumberofbidissmokedperdaywithrespecttobidipriceisestimatedtobe‐0.22.

WhenestimatedbySES,wefindthatthedailybidismokingofhighSESsmokersismoresensitivetochangesinbidipricethanthatoflowandmediumSESsmokersandtheirpriceelasticityofbidiconsumptionisstatisticallysignificant.ThehighSESbidismokersusuallypurchasebidisfromthehighendofthebidipricerange,whichoverlapswiththecigarettepricesatthelowerendofcigarettepricerange.Theclosenessofbidiandcigarettepricesatthemarginincreasestheprevalenceofdualsmoking—thatis,smokingbothcigaretteandbidibyasignificantproportionofsmokersinBangladesh.Accordingtohousehold

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enumerationconductedpriortotheWave1(2009)surveyfieldwork,theprevalenceofcigarettesmokingwas18.8%,bidismokingwas12.4%;andsmokingbothbidiandcigaretteswas9.3%.Thusabouthalfofcigarettesmokersandthree‐fourthsofbidismokersinBangladeshsmokebothtobaccoproducts,eitherregularlyoroccasionally.Thesedualsmokerswouldgenerallyhavetendencytoswitchbetweencigaretteandbididependingontherelativepriceofthesetwoproducts,amongothers.Whenbidipriceincreases,thehighSESsmokerstendtocutdownbidiconsumptionandswitchtosmokingcigaretteswhichbecomerelativelycheaper.Outof292exclusivebidismokersinterviewedatWave1,21%weresmokingcigarettesatWave2;of329dualsmokersatWave1,17%becameexclusivecigarettesmokersatWave2.ThetendencytosubstitutecigarettesforbidiisexpectedtobestrongeramonghigherSESsmokersbecauseofgreateraffordabilityofcigarettesamongthem.Thesedynamicsofthejointdecisiontosmokecigaretteandbidicallsformorerigorousinvestigation,whichwouldbeundertakenusingthelongitudinaldatacollectedbyITCBangladeshSurveys.

Table3.2009­10Priceresponsivenessofsmokingbehaviour.

CIGARETTE All LowSES MediumSES

HighSES

A.Priceelasticityofdailycigaretteconsumptionofsmokers

‐0.22*** ‐0.22*** ‐0.22** ‐0.17***

B.Priceelasticityofcigarettesmokingprevalence

‐0.44*** ‐0.54*** ‐0.51** ‐0.42**

A+B.Totalpriceelasticityofcigarettedemand

‐0.66 ‐0.76 ‐0.73 ‐0.59

BIDI

C.Priceelasticityofdailybidiconsumptionofsmokers

‐0.22** ‐0.13 ‐0.24 ‐0.50**

D.Priceelasticityofbidismokingprevalence

0.03 ‐0.13 0.16 0.22

C+D.Totalpriceelasticityofbididemand

‐0.22 ‐ ‐ ‐0.50

Note:***,**,*standfor1%,5%and10%levelofsignificance,respectively.Source:ITCBangladeshSurvey,2009,2010.

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Thefindingsofpriceelasticityofdemandforcigarettesandbidishaveimportantimplicationsforpublichealth.Forasmoker,positivehealthbenefitsarerealizedtoa(much)greaterextentforquittingthanforreducingconsumption.Andthus,theproportionofthetotalpriceelasticitythatisaccountedforbyelasticityofsmokingprevalenceisrelevanttoanunderstandingoftheimpactofincreasingpriceonquitting.TheWorldBanktreatiseof1999foundthatoverallforhighincomecountries,theproportionofthetotalpriceelasticitythatisaccountedforbyelasticityofsmokingprevalenceisabout50%.6FromouranalysisofITCBangladeshSurveydata,theproportionis0.44/0.66=67%forcigarettes.Thus,iftaxeswereincreasedoncigarettesinBangladesh,therewouldbegreaterimpactonreducingtheprevalencerate(leadingtogreatergainsinenhancinghealthatthepopulationlevel)thanwouldbethecaseinmostothercountries.

ImplicationsfortobaccotaxationpolicyThepriceelasticityestimatesindicatethattobaccoconsumptioncanbesignificantlyreducedbyemployinghighertaxesandprices.Giventheinelasticdemandforcigarettes,itisexpectedthatthepercentagereductionincigaretteconsumptionwouldbelessthanthepercentageincreaseinpricefromagiventaxincrease,thusyieldinggreateramountoftaxrevenuetothegovernment.Althoughbidismokingprevalenceappearstobepriceinsensitive,thedailybidiconsumptionofsmokerscanbesignificantlyreducedbytaxandpriceincrease.Giventheinelasticdemandforbidibycontinuedbidismokers,taxrevenuecollectedfrombidismokerswillcontinuetorisewiththetaxandpriceincrease.

Theeffectivenessoftobaccotaxation,however,canbeweakenedtoagreatextentbythepresenceoftieredadvaloremtaxstructure,suchastheoneforcigarettesinBangladesh,whichmaytriggerdownwardswitchingtolowerpricedbrandswhencigarettetaxesareincreased.Incontrast,therewasupwardmovementofsmokersfromthelowestpricetiertothemediumandhighpricetiersreflectingincreasedaffordabilityofcigarettesin2009‐10—thepercentageofcigarettesmokersinthelowesttierfellfrom73.2%to43.1%andthepercentageinthemediumtwotiersincreasedfrom23.7%to56%(seeFig1).

6 World Bank. Curbing the Epidemic: Governments and the Economics of Tobacco Control. Washington, D.C., 1999.

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Fig1.2009­10Distributionofcigarettesmokersbytypeofcigarettebrandsatdifferentpricetiers(weightedbyaveragedailycigaretteconsumption)

Note:ThepercentagesarecalculatedbysummingthepercentagesofsmokersbelongingtotheNBR‐specifiedpricetierandthepricegapimmediatelyaboveitfromTable1.Source:ITCBangladeshSurvey2009,2010.Furthermore,thedifferentialtaxstructureandgapsbetweenthepricetiersallowtobaccocompaniestoevadetaxthroughfalsedeclarationofbrandbyusingthesametaxstampsandbanderoleontwopricepointsinthelowerpriceslab.AccordingtotheestimateoftheNationalBoardofRevenue,thegovernmentloses3,000billionTakaannuallyduetothistypeoftaxevasionbytobaccocompanies.Moreover,asTable1shows,agreaterpercentageofsmokersbuycigaretteswithinapricerangethatishigherthanthetierspecifiedbytheNationalBoardofRevenueandfallsbetweentwosuccessivetiers.Thisphenomenonisattributabletothefactthatmorethantwo‐thirdsofcigarettepurchasestakeplaceinloosecigarettesratherthaninpackform.Purchasingloosecigarettescoststhesmokermoreperstickthanitwouldcostthemhadtheyboughtinpacks.Inprinciple,thegapsbetweenpricetiersshouldberemovedandthepriceslabsshouldbecontinuous.However,advaloremtaxoughttobereplacedbyspecific(unit)taxinviewoftheconsiderationthattobaccoproductsofallpricelevelsareequallyharmfultohealth.Tobaccotaxshouldnotbedifferentiatedbydifferentialtaxratesonthegroundofprogressivityoftaxrate.

Smokers’opinions:Doesprice/taxoftobaccoproductsmatter?

AnumberoffindingsfromtheITCBangladeshSurveysuggestthatsmokerscareaboutthecostsofbuyingcigarettesorbidis.Taxandpriceincreaseswillmotivatethoughtsandactionamongsmokerstowardcuttingdowntobaccoconsumptionorquitting.Moreover,taxandpriceincreasecantriggercompensatorybehaviouramongbothsmokersandtobaccomanufacturerstominimizecostsandavoidtaxes,whichcaninturnunderminetheeffectivenessoftaxationasatobaccocontrolmeasure.

73.7%

6.1%

17.3%2.8%

2009

Low

Medium

High

Premium

42.9%

33.7%

22.3%

1.1%

2010

Low

Medium

High

Premium

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1. Tobaccospending:Themajorityofsmokers(91.3%ofcigarettesmokersand85%ofbidismokers)atWave1saidthattheyspendtoomuchmoneyontobacco.Thepercentages,however,decreasedto81.8%and80.1%forcigaretteandbidismokersrespectivelyatWave2.Thissuggeststhattheaffordabilityofcigaretteandbidihasincreased(seeFigure2).About75%ofcigarettesmokersand66%ofbidismokersatWave2reportedthinkingabouthowmuchmoneytheyspendontobacco.Theopportunitycostoftobaccouseisreflectedintheresponseof4‐5%ofsmokerswhoreportedthattheyspentmoneyontobaccothattheyweresupposedtospendonfood.However,theaveragemonthlyhouseholdspendingontobaccoproductsislowandactuallydecreasedinrealtermsfrom571TakaatWave1to529TakaatWave2.Fig2.Percentageofcigaretteandbidismokerswhoagreeorstronglyagreethattheyspendtoomuchmoneyontobacco,Wave1andWave2

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2. Quitting:About6%ofsmokersatWave1hadquitsmokingatWave2.Ofthosewhohadquit,36.3%reportedthatpricewasoneofthereasonsforquitting—54.5%ofcigarettesmokersand38.6%ofbidismokers.Thesepercentages,however,decreasedto42.4%forcigarettesand26.8%forbidiatWave2indicatingthattheroleofpriceinstimulatingquitintentionshadweakenedconsiderablyinjustoneyear(Figure3).

Fig3.Percentageofexclusivecigaretteandexclusivebidismokerswhothinkthatpriceoftobaccoisareasontoquit,Wave1andWave2.

Thepercentageofcigarettesmokers(includingdualsmokers)whothinkthatpriceisareasonforquittingsmokingisthethirdlowestof19ITCcountries(Figure4).ThesearestrongindicationsthatpriceisnotanimportantfactorinmotivatingsmokerstoquitinBangladesh,convergentevidencefortheimportanceofincreasingtax/priceinthecountry.

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Fig4.Percentageofsmokerswhothinkpriceisareasontoquitsmokingin19countriesoftheITCProject.

3. Productsubstitution:Outof2100exclusivecigarettesmokersatWave1,4%switchedtobidisoraddedbidistotheircigarettesmokingbyWave2.91.4%ofsmokerswhoswitchedfromexclusivecigarettetoexclusivebidismokingreportedthattheychosebidisovercigarettesbecausebidisarecheaperthancigarettes.35.9%ofsmokerswhowereexclusivecigarettesmokersatWave1andstarteddualsmokingreportedthattheyaddedbidisbecausebidisarecheaperthancigarettes.Thusitappearsthatthelargepricedifferentialbetweencigarettesandbidisinducesproductsubstitutionandswitchingtothecheaperbidis.Thisweakenstheeffectivenessoftaxandpriceincreasesinreducingtobaccoconsumption.

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4. Brandchoice:58%ofcigarettesmokersand60.9%ofbidismokersatWave1

reportedthattheyselectedthebrandtheyusuallysmokeduetoitsprice.Thesepercentagesincreasedto60.4%and65.8%atWave2.Amongtherelativelyfewsmokerswhosmokeforeignbrands,1.2%ofcigarettesmokersand3.1%ofbidismokersatWave1reportedthatpricewasthereasonforselectingtheparticularforeignbrandtheysmoke.However,atWave2,thecorrespondingpercentageshotupto10%forcigarettesmokerswhilefallingto1.5%forbidismokers.Thismightsignalthatforeignbrandcigarettesarepenetratingthedomesticmarketthroughpricecompetitionwithdomesticbrands,whiledomesticbidiproducersareoutcompetingforeignbrandsofbidi.

5. Tax/priceavoidance:7.9%ofcigarettesmokersand19.3%ofbidismokersatWave1reportedthattheymadespecialeffortstobuycheaperproductsthanthoseavailableinlocalstores.Thesefindingsreflectthatthiscostminimizingbehaviourismoreprevalentamongbidismokers.Thispercentage,however,increasedslightlyto8.6%forcigarettesmokersanddecreasedto17.3%forbidismokersatWave2.Thefactthatthistendencyisgrowingamongcigarettesmokersandfallingamongbidismokersmightbetheoutcomeofthegrowingpricedifferentialbetweencigaretteandbidi.Moreover,4.2%ofsmokersatWave1reportedthattheyreceivedspecialpriceoffersfromtobaccosellers.Thispercentageincreasedto7%atWave2,whichmaysuggestthattobaccocompanieshaveexpandedtheirtobaccopromotioneffortsbyofferingpriceincentivestosmokers.

SummaryandPolicyRecommendations

Globally,tobaccotaxationhasprovedtobeoneofthemostpotentinstrumentsincurbingthetobaccoepidemic.Thenegativerelationshipobservedbetweentobaccoconsumptionandpricingsuggeststhatincreasingtobaccotaxesbyasignificantamountcouldpotentiallyavertmillionsofprematuretobacco‐induceddeathsanddisabilitiesinBangladesh.AsthecigarettesmokerswithlowerSESaremorepricesensitive,theywillcutdowntheirsmokingbyalargerpercentagethanthesmokerswithhigherSES.Asaresult,greaterhealthgainswillaccruetothosewithlowerSES.Tobaccotaxcanthuscontributetoreductioninhealthinequalityaswell.Atthesametime,thegovernmentcanreapsignificantgainsintaxrevenuebecausetheconsumptionofcigarettesandbidiswouldfallbyalesserpercentagethanthepercentageincreaseinprice.Thusthegoalsofpublichealthpromotionandtaxrevenueincreasearenon‐competing.Unlikeotherpoliciesthatmayhaveunexpectednegativeconsequences,increasingexcisetaxesoncigarettesandbidisrepresentsatruewin‐winopportunityfortheBangladeshGovernment.

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Ourestimatesshowthatinordertomeettherequirementofexcisetaxontobaccoaccountingfor70%ofretailprice,theSDonbothcigaretteandbidimustincreaseto400%.Otherthingsremainingthesame,thistaxratewillincreasecigaretteandbidipricesmorethanthreefold.Weappreciatethefactthatitmaynotbefeasibletoraisethecurrenttobaccotaxratesto400%atatimewhenthereispoliticalresistancetoANYtaxincreasefromthebeneficiariesoftobaccouse.ThegovernmentofBangladeshcanconsiderasuboptimalexcisetaxratethatissignificantlyhigherthanthecurrentrates,whichwouldstilloperatetoreduceoveralltobaccodemandinthecountry.

InviewofthefindingsoftheanalysespresentedfromtherichanddetailedinformationcollectedintheITCBangladeshSurveyovertwoyears,thefollowingrecommendationscanbemadeforthecurrenttobaccotaxpolicyinBangladeshovershort,medium,andlongterms:

Short­termstrategy:Reducethegapbetweenthetaxratesfordifferenttiersofcigarettepricesandworktowarduniformtaxrates.

1. ReducethenumberofpricetiersforcigarettesfromfourtothreebymergingtoptwotiersforhighandpremiumbrandcigarettesandapplySDat58%.Thisratewouldbeapplicabletoallcigaretteswithretailpriceabove20Takagiventhe2010‐11priceslabs.

2. Forthemediumleveltier,raisetheSDto56%.3. IncreasetheSDrateforthelowesttierfrom33%to40%.4. LevySDonbidisbasedonretailpriceinsteadoftariffvalue.TherateofSDon

unfilteredbidicanbemaintainedat20%intheshort‐term.

Medium­termstrategy:Reducethetaxgapbetweenbidisandthecheapestcigarettesandintroduceaspecificexcisetaxfloor.

1. IncreasetheSDonbidis(bothunfilteredandfiltered)from20%to40%toeliminatethedifferencewiththeSDforthecheapestcigarettes.

2. Introduceaspecificexcisetaxinadditiontotheexistingadvaloremtax,inordertoensureaminimumpriceforcigarettesandbidis.

3. Forcigarettes,theruleshouldbetoraisetheaveragepriceoflowpricebrands,whichiscurrently10Takaperpackof10,totheleveloftheaveragepriceofmediumpricebrands,whichiscurrently20Takaperpack.Inordertoachievethisgoalofsettingtheminimumpriceperpackof10cigarettesat20Taka,specifictaxshouldbesetat10Takaforcigarettesthatarecurrentlysoldfor10Takaorbelow.

4. Forbidi,theminimumpriceshouldberaisedto20Takaperpacktomaketheaveragepriceofbidicomparabletothecheapestcigarettesaftertheadditionofthespecifictax.Thiswouldrequireaspecifictaxof14Takaperpackofbiditoraisetheaverageretailpriceofapackofbidifromthecurrentlevelof6Takato20Taka.

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Long­termstrategy:Harmonizetheexcisetaxrateandreplaceadvaloremtaxwithspecificexcisetax.

1. Harmonizetheexciseratesbylevyingsametaxratesforalltobaccoproducts.2. Increasethetaxratesbythesameamountforalltobaccoproducts.3. Replacetheadvaloremtaxratecompletelywithspecificexcisetax.4. Adjustthespecifictaxforinflationandincomegrowtheveryyear.

australiaBangladeshBhutanBrazilCanada

China (Mainland)FranceGermanyIndiaIreland

MalaysiaMauritiusMexicoNetherlandsNew Zealand

South KoreaThailandUnited KingdomUruguayUnited States of america

20 countries • 50% of the world’s population 60% of the world’s smokers • 70% of the world’s tobacco users

The International Tobacco Control Policy Evaluation Project

The ITC ProjectEvaluating the Impact of FCTC Policies in...

Geoffrey T. Fong, Ph.D. Department of Psychology University of Waterloo 200 University Avenue West Waterloo, Ontario N2L 3G1 Canada

Email: itc@uwaterloo.ca Tel: +1 519-888-4567 ext. 33597 www.itcproject.org