Nusrat Jahan
Discussions regarding the tobacco sector typically resurface whenever the national budget approaches. This is because the sector is one of the government's highest revenue generators, while there is simultaneously a pressing need to reduce tobacco-related health damages. Approximately 9% to 11% of the country’s total revenue comes from the tobacco sector; consequently, there is no scope to ignore it within the realities of the economy.
Approximately Tk35,000 to Tk40,000 crore in revenue is collected from this sector annually. The government frequently increases taxes and prices on tobacco and tobacco products with the primary goals of reducing usage and increasing revenue. However, research suggests that this strategy is not fully effective.
Currently, Bangladesh is among the countries with the highest duty and tax rates in the tobacco sector. In the 2009-10 fiscal year, the maximum tax on tobacco was 63%. This has rapidly increased to nearly 83% in the 2024-25 fiscal year, which is higher than the target set by the World Health Organization (WHO). According to the WHO, tobacco taxes should be kept around 75%.
The question is: Despite high tax rates, is the current tax system achieving its goals?
Research and reality say no. According to a research report by the global consultancy firm Ernst & Young (EY), the multi-tiered ad-valorem (value-based) tobacco tax system in Bangladesh has become extremely complex and ineffective. Here, tobacco taxation has reached the peak of the Laffer Curve. This means taxes have become so high that further increases risk decreasing government revenue rather than increasing it. This is reflected in reality: despite tax hikes, revenue growth in this sector has significantly slowed over the past few years.
Citing an example from last year, the report states that after increasing tobacco taxes and prices in January 2025, revenue growth in the first quarter of that year was only 0.9%. Furthermore, this tax structure is not effectively reducing the smoking rate. Instead, it has been observed that after price hikes, smokers shift to lower-tier or relatively cheaper cigarettes. As a result, nearly 90% of cigarettes in the country are now sold in the third and fourth tiers. The rise of the black market also poses a major risk to public health. According to a report by the research firm Insight Metrics, illicit products now occupy about 13.1% of the country's cigarette market. Every month, approximately 832 million sticks of illegal cigarettes enter the market. Consequently, sales of legal brands are declining, costing the government nearly Tk4,000 crore in annual revenue. Overall, the existing tax structure is creating limitations in three areas: revenue management, market control, and public health goals.
Cigarette taxes in the country are divided into four tiers: low, medium, high, and premium. This multi-tiered structure is not only complex but also entirely value-based. Currently, very few countries in the world use a value-based tax system for tobacco. Moreover, the multi-tiered system is administratively unsuitable, increasing complexities in tax assessment, monitoring, and collection. At the same time, annual tax hikes expand the market for illegal cigarettes. Smuggling through borders, unlicensed production, and tax evasion have become major concerns. As illegal products in the market increase, so will the government's revenue loss.
Simply changing taxes and prices year after year to increase revenue and reduce smoking is not a sustainable solution. Given the current reality, a long-term and stable tobacco tax policy is required. First, the tax structure needs to be simplified through necessary reforms. Instead of the current multi-tiered ad-valorem system, there should be a shift toward a specific tobacco tax structure. This would increase revenue collection and ensure market and investment stability due to predictable taxation. Bangladesh should consider this experience.
Second, the transition must be gradual and planned. Unplanned tax hikes in the tobacco sector create market shocks and risks of increased illicit trade. Therefore, implementing reforms in stages through a 5–10 year roadmap would be realistic. Using modeling in the EY study, it was shown that if price tiers are gradually merged into a single minimum price while keeping current tax rates unchanged, revenue from this sector could grow at a rate of 9.2% annually from the 2026-27 fiscal year to 2035-36.
Third, no policy will succeed without controlling the illicit market. Monitoring must be strengthened at borders, ports, and production levels. Simultaneously, the introduction of ‘track-and-trace’ technology and strict measures against unlicensed production and smuggled cigarettes are essential.
Reducing tobacco use is a responsibility of the state. Similarly, a major responsibility is to secure funds for national development by increasing revenue. Solutions cannot be achieved solely through strict laws or tax hikes. Rather, a balanced and long-term plan regarding the tobacco tax structure is needed. Implementing such a plan would increase revenue while also reducing the smoking rate. Many are waiting to see that foresight from the government starting with the budget for the upcoming 2026-27 fiscal year.
Nusrat Jahan is a communications professional, journalist, and writer.
