Tobacco taxation is one of the most important pillars of public finance in Bangladesh. Contributing to approximately 9 percent of total government tax revenue, it has remained the largest and most reliable source of revenue generation. However, the current system is under severe strain. Slowing revenue growth, diminishing returns from repeated and ad hoc tax increases, and rising risks of down-trading and illicit trade indicate a deeper structural problem within the taxation system of the country. Such an early stage of revenue stagnation led by the current system gives rise to a key policy question: How can the reformation of the tobacco tax structure deliver higher and more stable revenue?
Delving into this question requires an understanding of the current tobacco tax system in the country. Bangladesh’s tobacco tax system is built upon a fully ad valorem, multi-tiered Supplementary Duty (SD) structure, combined with VAT and a Health Development Surcharge. The system includes four price tiers and results in a total tax incidence of 83 percent at the final retail price, placing it among the highest in the world. Additionally, the government sets both minimum and maximum retail prices.
While this system has historically generated strong revenue, recent trends suggest that its effectiveness is limited. The price and Supplementary Duty increase in January 2025 resulted in only a 5 percent rise in revenue, compared to a 17 percent increase in FY2015 following similar measures. This sharp decline in marginal returns suggests that the system is approaching its revenue ceiling, making sustainable revenue generation from further increases in tax rates unlikely.
Besides, the system structure also creates distortions in the market. The multi-tier design leads to uneven tax burdens across price segments, which encourages consumers to switch to cheaper brands. This down-trading behaviour reduces the effectiveness of tax increases and weakens revenue collection. It also creates opportunities for manufacturers to adjust pricing strategies and remain within lower tax tiers. These dynamics erode both fiscal outcomes and public health objectives.
Administrative challenges further compound these issues. Ad valorem taxation depends on accurate price declaration, which creates scope for undervaluation and tax avoidance. Monitoring various price points that determine the revenue increases the complexity and places additional pressure on enforcement systems. As a result, the current structure is not only less effective in generating revenue but also more difficult to administer efficiently. Taken together, these issues make a compelling case for rethinking the current tobacco tax structure to ensure long-term fiscal sustainability and effectiveness.
One potential alternative to address these challenges lies in moving away from the limitations of the current ad valorem system, which is often more volatile, complex to enforce, and susceptible to manipulation, toward a specific excise tax structure. Specific excise taxes apply a fixed amount per unit, independent of product value, and offer several advantages over the current system. They generate stable and predictable revenue because they are not affected by changes in pricing strategies. They also narrow the price gap between premium and low-cost brands, which reduces incentives for down-trading. In addition, they are easier to administer, as authorities need to monitor quantities rather than verify declared prices.
These advantages are reflected in global trends, where countries are increasingly shifting away from ad valorem tobacco taxation toward specific or mixed excise systems to ensure more predictable revenue, simpler administration, and stronger consumption control. By 2024, specific taxes had become the dominant approach among 178 countries, with 70 countries using them exclusively, up from 56 in 2008, while reliance on purely ad valorem systems declined from 56 to 33 and mixed systems increased from 45 to 67. Even within mixed structures, there is a clear move toward strengthening the specific component, reflecting its advantages in improving revenue stability and reducing price manipulation.
Country experiences further reinforce the effectiveness of shifting toward specific taxation. Indonesia’s experience shows how a gradual transition from ad valorem to a specific system can deliver steady revenue growth alongside reduced consumption and a more streamlined tax structure. Bolivia underscores the importance of indexation, where linking specific taxes to inflation helped stabilise revenue and preserve its real value over time. Similarly, Türkiye’s shift toward a mixed system with a stronger specific component resulted in significant revenue gains, even as reliance on ad valorem taxation declined.
These examples highlight a consistent pattern. Countries that simplified their tax structures to specific ones with indexation or strengthened specific components in mixed systems achieved stronger and more predictable revenue growth. Such reform also reduced consumption and improved administrative efficiency. In contrast, systems that relied heavily on ad valorem taxation faced persistent challenges, including price gaps, down-trading, and revenue volatility as evident in case of Bangladesh.
Simulation analysis from Policy Exchange Bangladesh further supports the case for reform. Using two decades of national data, the study finds that shifting to a fully specific excise system could generate an additional BDT22,654 crore in revenue over ten years. At the same time, it could reduce cigarette consumption by a further 8.6 percent compared to the current system. Even a mixed system with a strong specific component would deliver significant fiscal and health gains. These findings clearly show that continued reliance on ad valorem taxation constrains future revenue potential.
A clear set of policy recommendations emerges from this evidence. First, Bangladesh should transition toward a fully specific tobacco excise system to stabilise revenue and improve predictability. A more gradual approach to a mixed system with a strong specific component, before moving to a fully specific regime, can be considered. However, the transition to mixed would add complexity in the implementation. Second, the number of tax tiers should be simplified to reduce price gaps and discourage down-trading. Third, taxes should be indexed to inflation or income growth to maintain their real value over time. Fourth, strengthening data and analytical capacity will support evidence-based policymaking. Finally, reforms should be implemented through a phased, multi-year roadmap to ensure a smooth and manageable transition.
Administrative reforms are equally important. In this regard, introducing digital tax stamps and real-time verification systems can reduce evasion and counterfeiting. Automating reporting and compliance processes can improve efficiency and transparency. Centralising supervision under a single authority and integrating audit systems can further strengthen enforcement and revenue collection. The implication of these reforms is clear. A gradual and well-sequenced transition toward a system anchored in specific taxation would enhance revenue stability, reduce opportunities for manipulation, and improve administrative efficiency, while reinforcing the broader objective of reducing tobacco consumption.
Bangladesh now faces a clear choice. Continuing with the current ad valorem system risks further revenue stagnation, growing inefficiencies, and weakening policy impact. In contrast, a gradual and well-designed shift toward a system anchored in specific taxation offers a more stable and predictable revenue path, stronger administrative control, and more effective outcomes in reducing tobacco consumption.
The views expressed in this article are solely those of the author
The writer is the Chairman and CEO, Policy Exchange Bangladesh
