Taxing Tobacco in Nepal: What can be done

Taxing Tobacco in Nepal: What can be doneMay 2020

Contributors for this paper:

Name Position Organization Ruzel Shrestha Research Associate NDRIJess Latchford Economic Advisor Kivu International, UKWill Paxton Founder/Director Kivu International, UK

Taxing Tobacco in Nepal: What can be done


Acknowledgements NDRI would like to thank Cancer Research UK and Nepal Health Education Information and Communication Center, Ministry of Health and Population, Government of Nepal for facilitating this study.

We would like to acknowledge Dr. Jaya Kumar Gurung, Dr. Basudev Pandey, Director of Epidemiology and Disease Control Division, Dr. Pranil Man Singh Pradhan, Associate professor of Institute of Medicine and Mr. Kunj Joshi, Deputy director of NHEICC and Dr. Rudra Suwal for their continuous guidance and support during the survey and preparation of this report. We appreciate all individuals, health institutions, government offices, local bodies, hospitals, schools, hotels and restaurants who cooperated to provide valuable information during the survey. We would also like to record our appreciation for the input provided by Dr. Devi Prasai, Health Economist who has been giving periodic guidance over the course of this study.

NDRI would like to express gratitude to the Kivu International team, Will Paxton, Jess Latchford and Becky Hatch for their contributions in this report. The efforts of Ruzel Shrestha, Sangita Shakya and Inisa Shrestha from NDRI are greatly appreciated in putting this report together.

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Contents

Executive summary 1Introduction 4Section 1 6Taxing Cigarettes: Understanding Tax Instruments 6Section 2 7A review of International Experiences 7

2.1 Myanmar – reform, but unlikely to be ineffective? 82.2 Kenya: A political lesson in tobacco tax policy 102.3 Bangladesh: A case of a tax wedge 122.4 Brazil- an effective tobacco tax policy 152.5 Serbia: a win-win scenario 182.6 Vietnam: A lesson in assessing the tax base 21

Section 3 23Taxation of Tobacco in Nepal 23

3.1 Overview of Nepal’s tobacco taxation system 233.2 Affordability of Tobacco 263.3 Tax revenue from tobacco products 27

Section 4 28Understanding how taxes affect tax administration, consumers and producers 28

4.1 Tax Administration 284.2 Producer 284.3 Consumer 304.4 Lessons for Nepal: 32

Section 5 33Taxes and Tobacco: Findings from the Survey 33Section 6 40Policy Recommendations 40Appendix 45

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List of Tables

Table 1: Summary of International Experiences 7Table 2: Myanmar Tobacco Taxation – 2016 reform moving from ad valorem tax to tiered excise tax structure 9Table 3: Percentage of tax out of retail price is quite low even post reform 9Table 4: Tobacco taxes in Kenya 11Table 5: Rates of excise duty (KShs. Per 1000) on cigarette sales in Kenya, 2015 12Table 6: Tiered Tax system of Bangladesh. We see a significant difference between the rates of the lower tier tax band and the higher tax bands 13Table 7: Average cigarette price, consumption and market size of cigarettes 16Table 8: IPI taxes on cigarettes from December 2011 17Table 9: PIS and COFINS duties on tobacco suppliers 17Table 10: Effective tax rate for the most sold brand (Derby) when the special rule is applied 18Table 11: Breaking down the price of a pack of the most sold brand of cigarettes in Vietnam (2016) 22Table 12: Structure of tobacco taxes in Nepal 23Table 13: Real tax (adjusted for inflation) of tobacco products 25Table 14: Consumer Price Index Vs Price of Tobacco Products 26Table 15: Change in Price of Tobacco, Change in GDP per capita and Tobacco Affordability Index 26Table 16: Tobacco tax out of total revenue has been shrinking in the last decade 27Table 17: Tobacco tax as a percentage of tax revenue 27Table 18: Percentage Change in Tax of Tobacco Vs Percentage Change in Price of Tobacco (A possible price over-shifting) 29Table 19: Effects of a specific tax on cigarettes of various prices 31Table 20: Price Gap between brands of different prices are maintained in the case of an Ad-valorem tax 31Table 21: Price gap between higher priced brands and lower priced brands shrink because of a specific tax 32Table 22: Support for increase in tax 34Table 23: Geographical Region wise support for increase in taxes 34Table 24: Province wise support for increase in taxes 34Table 25: Age-wise support for increase in taxes 34Table 26: Tobacco user vs non-user for support in increase in taxes 35Table 27: What proportion of the retail price should go to the government as tax 35Table 28: Percentage of tobacco users buying from retail shop is highest 35Table 29: Province wise division of where people get their tobacco products 36 Table 30: Geographical region wise division of where people get their tobacco 36Table 31: Tobacco users response: if tobacco price is doubled 36Table 32: Region wise response: if price of the tobacco product is doubled 37Table 33: Province wise response: if price of the tobacco product is doubled 37Table 34: Age-wise response: if the price of the tobacco product is doubled 38Table 35: NDRI preferred option [Option 1]– a tax increase with a reduction in the difference between tax bands 41Table 36: Option 2 (low): Forty five percent increase in specific tax across the different bands 41Table 37: Option 3 (medium): Seventy Five percent increase in specific tax across the different bands 41Table 38: Option 4 (high): Hundred percent increase in specific tax across the different bands 42Table 39: Estimations of percentage change in revenue, change in revenue (cash terms), percentage change in retail price, percentage change in consumption 43

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List of Figures

Figure 1: Cigarettes have become more affordable in Kenya (1999- 2013) 10Figure 2: Average price per pack of cigarettes (KShs.) in current prices, 2013 constant prices and per adult annual consumption of cigarettes in Kenya, 1999-2013 11Figure 3: Tax-paid sales of all brands and low-price brands of cigarettes in Bangladesh from 2006-07 to 2016-17 14Figure 4: Market shares of low-, medium-, high- and premium-tier cigarettes brands in Bangladesh from 2006-07 to 2016-17 15Figure 5: Declining prevalence of smoking in Serbia 19Figure 6: Specific and ad-valorem excise in Serbia (2001-2018) 19Figure 7: Consumption and weighted average price of cigarettes in Serbia (2005-2017) 20Figure 8: Increasing revenue from tobacco excise duty to Serbian public revenues 2005-2017 20Figure 9: Average tax base and excise duty added to the per pack of cigarettes in Vietnam (inflation adjusted), 2006-2016 21Figure 10: Significant difference between the different tax tiers for cigarettes (2019) 24Figure 11: Nepal has the second lowest tax as a percentage of most sold brand of cigarettes in South Asia 25Figure 12: Most people think its government’s responsibility to reduce tobacco use 33Figure 13: Percentage of income spent on tobacco is lower in the higher per capita expenditure quintile 38Figure 14: Percentage of income spent on cigarettes and bidi (disaggregated by per capita expenditure) is lower in the higher per capita expenditure quintile 38Figure 15: There is no correlation between the income quintiles and the number of sticks smoked per week 39Figure 16: Revenue Estimation 42

Abbreviations and Acronyms

GDP Gross Domestic ProductPED Price Elasticity of DemandTAI Tobacco Affordability IndexVAT Value Added TaxWHO World Health Organization

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Executive summary In Nepal, approximately 27,100 people die every year because of diseases caused by tobacco.1 The total cost of tobacco use, including direct healthcare costs and indirect costs such as loss in productivity due to tobacco-related illness, amounts to around 0.86% of GDP (2016/17)2. Crucially in the current context, emerging evidence suggests a link between the severity of COVID-19 symptoms and smoking.

Despite efforts to reduce tobacco use in Nepal – through taxation, advertising restrictions, smoking bans and awareness campaigns – prevalence of tobacco use in Nepal has remained consistently high in the last decade at 30.8% in 2012/133 and 28.9% in 2019.4 5 Most recently, NDRI’s survey carried out in December 2019 found that prevalence rates are even higher, at 31.7%.

Among the various tools available to policy makers, increasing taxes on tobacco products is considered the most cost-effective method.6 Tobacco taxation typically increases the retail price of tobacco products and consequently reduces the demand. Evidence suggests that in low- and middle-income countries a 10% increase in the price of tobacco products is expected to reduce demand by 5-10%7. This is the assumption we have used in our calculations.

In this report we review the cigarette taxation systems in six country case studies and, drawing on these international experiences, make the case for a significant increase in tobacco tax. We show why the current taxation of cigarettes has not been sufficient to reduce consumption in Nepal and how the tax system could be improved going forward.

Revenue Raising and Improved Health: a win-win

A substantial increase in tobacco taxation in Nepal is a win-win – good for public health and revenue raising for the Ministry of Finance.

In the current COVID-19 context this potential win-win is even more important: COVID-19 has had a severe impact on remittances, tourism, domestic activity and is expected to substantially weaken Nepal’s GDP growth and hit government revenue.8 At the same time, the spending pressures, particularly on the health system, are high.

Public support for higher taxes on tobacco

NDRI’s survey found high levels of public support for increased taxation on tobacco. More than three quarters (76%) of respondents said that the government should increase the tax rate in Nepal. Even in the poorest quintile, 63% of poorer Nepali’s agreed that taxes should be increased and only 22% disagreed.

Higher taxation on cigarettes would, at this critical time: (a) raise more revenue, (b) support public health, and (c) command public support.

1 https://tobaccoatlas.org/country/nepal/2 Authors calculation using the tobacco atlas figures and Nepal Rastra Bank Data3 https://www.who.int/ncds/surveillance/steps/2012-13_Nepal_STEPS_Report.pdf4 https://www.who.int/ncds/surveillance/steps/NPL_2019_National-Factsheet-English-1.pdf?ua=1.5 This survey was conducted from February to May, 20196 World Health Organization (2010), “WHO Technical Manual on Tobacco Tax Administration”7 https://www.who.int/news-room/fact-sheets/detail/tobacco8 https://www.imf.org/en/News/Articles/2020/05/07/pr20209-nepal-imf-executive-board-approves-us-million-disbursement-address-covid-19-pandemic

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Recommendations

1. Substantially increase tax rates. While tobacco taxes have been increasing in line with inflation over the last few years, the most fundamental problem of tobacco taxes in Nepal is that taxes are very low to begin with. The taxation of tobacco products in Nepal is significantly below the WHO standard of 70% of retail price. As of 2019, Nepal imposes tobacco tax of just 15.5% of retail price (excluding VAT), which is the lowest among South Asian countries.9 Our analysis shows that since 2016 tobacco has become more affordable. Therefore, there is an opportunity to increase taxes on cigarettes which will both decrease consumption and increase government revenues. This could be a crucial source of revenue during these fiscally pressing times.

2. Move to a uniform tax system. Specific taxes should be applied uniformly so that all cigarettes are taxed equally. A tax policy with multiple tiers creates opportunities for cigarette companies to reposition themselves to lower the tax band. Additionally, the wide range of taxes translates into a wide range of cigarette prices in the market which reduces the impact of tax on consumption by allowing for substitution. A single specific tax would be more effective in raising prices and would be simpler to administer.

We propose that these recommendations are rolled out over a maximum 6-year period. Whilst we recommend a movement to a uniform system in which all tiers are eventually set equal to the highest rate, phasing the introduction by gradually narrowing the tax bands helps to provide some predictability for consumers, and limits the impact of price increases for poorer consumers in any one year.

Year 1 – 2020 budget As a first step towards improving the tobacco tax structure, we propose a relatively straightforward uplift in the rate of tax applied to the existing tax tiers. This first step could be taken in this year’s budget. The current Covid-19 crisis increases the need for substantial increase to taxes to discourage people from smoking and raise much-needed additional revenue during a challenging economic period.

Ahead of the 2020 budget there are two interrelated decisions for policy makers on cigarette taxation. First, there is a question about the rate of increase in excise duties. Second, there is a question about how much to start to reform excise duties to narrow the difference in the specific taxes among different tiers, consistent with international best practice. NDRI’s preferred option seeks to balance three objectives for policy change: (i) raising revenue, (ii) correcting the recent increases in affordability of tobacco, and (iii) starting the longer-term reform process. The recommendations for year 1 put more weight on the first two objectives, but takes an initial step towards reform by introducing differential tax increases.

Our recommendation for tax increases in 2020 are presented in Table A. Our estimations suggest that these increases could result in up to 57% or Rs. 4.1bn additional revenue in the 2020/21 fiscal year. On average, this translates into a 10% increase on the price of a packet of cigarettes, and an estimated reduction in consumption of 5-10% in year 1.

Table A

Cigarettes 2019 (Percentage Change) New Tax(1) Without Filter 495 75 866(2) Up to 70 mm length 1135 70 1930(3) More than 70 mm up to 75mm length (with filter) 1475 65 2434(4) More than 75mm up to 85mm length (with filter) 1920 60 3072(5) More than 85mm length (with filter) 2715 55 4208

9 https://kathmandupost.com/health/2019/06/01/12-percent-tobacco-tax-hike-not-good-enough-health-experts-say


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A common concern with increasing tobacco taxes is that higher taxes create greater incentives for tax avoidance and evasion and will therefore increase illicit trade. While this risk should be considered, the extent of the problem is significantly overstated – usually by the tobacco industry to discourage tax increases. In Nepal, the porous border with India is a key source of concern, however, cigarette prices in India are 40% higher than in Nepal.10 As long cigarettes are more expensive in India – which will remain the case even with these proposed tax increases – the risk of increased illicit trade from India is low.

Years 2-6

In this second phase, cigarette tax would continue to increase annually over 5 consecutive years, eventually eliminating the difference between the tiers to create a uniform tax system. The lowest tier “without filter” has a significantly lower tax rate than the other tiers and will require sustained high increases over 5 years to collapse it upwards into a uniform system. Other tiers, such as (2) and (3) which are already relatively close could be collapsed quickly, i.e. within 1-2 years. The exact rates of increase would vary each year and should be decided based on ongoing evaluation of key variables such as affordability, tax out of retail price, revenue, consumption and prevalence rates.

During this phase, once the tiers have been collapsed into one specific tax rate, we propose an amendment to the excise duty law of Nepal which legally changes the tax system to a uniform specific tax on cigarettes.

Year 7 onwards

The final phase would consist of developing a policy tool to guide further tax increases to ensure that gains in reducing affordability are maintained. We propose an annual tax uplift that is made up of two components: firstly, a mandatory component that sees an increase in specific tax which is a function of inflation and income growth. Secondly, a discretionary uplift in tax which continues to increase the real tax rate and gradually moves Nepal towards the WHO guideline of 70% excise tax out of retail price.

10 WHO (2019). WHO report on the global tobacco epidemic 2019: Table 9.1 - Taxes and retail price for a pack of 20 cigarettes of the most sold brand. Available at: https://www.who.int/tobacco/global_report/en/


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Introduction

It is well understood that tobacco usage has a detrimental effect on human health. Tobacco use can cause non-communicable diseases such as diabetes, cancer, lung diseases and cardiovascular diseases.11 In addition, tobacco usage can affect households, particularly low-income households, by diverting financial resources to tobacco products and associated health costs, which could have otherwise been utilized productively.12

In Nepal, around 27,100 people die every year because of diseases caused by tobacco.13 The total costs of tobacco usage (which includes direct health costs and costs associated with decline in productivity because of adverse health effects of tobacco) amounts to around 0.86% of GDP (2016/17)14.

Nepal ratified the WHO Framework Convention on Tobacco Control on 7th November 2006 which was developed by the WHO to help countries address rising tobacco use and the associated health, social, environmental and economic consequences.15 Following this, a bill titled Tobacco Products (Control and Regulatory) Act (2011) was passed to make legal provisions “….to reduce, control and regulate the import, production, sales and distribution and consumption of tobacco products….” Since the bill was passed, Nepal has enforced warnings in cigarette packets (of over 75% of the package) and banned advertisements of tobacco products. Despite these successes, the bill has not been successful in reducing the prevalence of tobacco. On the contrary, according to the STEPS survey, prevalence of tobacco has remained quite high in the last decade at 30.8% in 2012/1316 and 28.9% in 2019.17 Most recently, NDRI’s survey carried out in December 2019 found that prevalence rates are even higher, at 31.7%. The STEPS survey shows that prevalence of both smoked and smokeless tobacco have remained fairly steady during the same period. For smoked tobacco, prevalence fell slightly from 18.5% in 2012/13 and 17.1% in 2019. For smokeless tobacco, it was 17.8% in 2012/13 and rose slightly to 18.3% in 2019. NDRI’s survey results show a continuation of this trend with just over a fifth of the population (20.1%) reportedly using smokeless tobacco and 15.6% using smoked tobacco.

While there are various policy tools which can be used to reduce tobacco consumption, increasing taxes on tobacco products is considered the most cost-effective method.18 Tobacco taxation typically increases the retail price of tobacco products and consequently reduces the demand. In low- and middle-income countries a 10% increase in the price of tobacco products is expected to reduce demand by 5-10%19. Despite this, the taxation of tobacco products in Nepal is significantly below the WHO guideline of 70% of retail price.20 Nepal imposes tobacco tax of just 15.5 percent of retail price (excluding VAT), which is the lowest among South Asian countries.21 Given the magnitude of the problem and the low levels of tobacco tax, there is a strong case for improving tobacco taxation in Nepal. The recommendations in this paper focus on specifically on the taxation of cigarettes in Nepal.22

11 World Health Organization (2019), “WHO Report on the Global Tobacco Epidemic” 12 https://www.who.int/tobacco/communications/events/wntd/2004/en/factsindividuals_en.pdf13 https://tobaccoatlas.org/country/nepal/14 Authors calculation using the tobacco atlas figures and Nepal Rastra Bank Data15 https://www.who.int/fctc/reporting/party_reports/nepal_2012_annex2_tobacco_profile.pdf?ua=116 https://www.who.int/ncds/surveillance/steps/2012-13_Nepal_STEPS_Report.pdf17 https://www.who.int/ncds/surveillance/steps/NPL_2019_National-Factsheet-English-1.pdf?ua=118 World Health Organization (2010), “WHO Technical Manual on Tobacco Tax Administration”19 https://www.who.int/news-room/fact-sheets/detail/tobacco20 Ibid., pg 5321 https://kathmandupost.com/health/2019/06/01/12-percent-tobacco-tax-hike-not-good-enough-health-experts-say22 While we do acknowledge that taxation on smokeless tobacco is also important, for this paper we intend to focus on just smoked tobacco


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In order to prescribe an effective policy, in this paper we attempt to:

1. Understand the tax instruments for taxing of tobacco 2. Review different country’s experience experimenting with different tobacco taxes3. Review Nepal’s current tax structure for tobacco products4. Present evidence from NDRI’s survey on attitudes and behaviours of tobacco users towards tax5. Develop recommendations for reform based on global evidence


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Taxing Cigarettes: Understanding Tax Instruments Most countries levy excise duty to tax cigarettes. In Nepal, excise duty is levied on select goods at the point the manufactured product is sold to wholesalers – not at the point of final sale.23 There are two ways in which excise duty on cigarettes can be imposed: 1) Specific Taxes and 2) Ad Valorem Taxes.

Specific excise is a set monetary amount which is levied on a pre-determined unit. Different countries have different units for specific excise. For example, in Chile the excise is levied per stick, whereas in Pakistan it is levied on a pack of 10 cigarettes. In the case of Nepal, the specific excise tax is levied on 1000 sticks of cigarettes after the cigarettes are produced in a factory.24

Ad Valorem excise are levied as a percentage of a price at a particular point in the supply chain. It could either be the price at the point of manufacturing or the wholesale price.25 This varies among countries. According to the Excise Duty Act (2002) of Nepal, the ad-valorem excise tax is levied at the point of manufacturing for all manufacture products. Currently in Nepal, there is no ad-valorem excise duty on cigarettes.

Both these excise taxes can be levied in two ways: 1) Uniform and 2) Non-Uniform (or Differential). Uniform tax rates imply that a single rate is levied on all of the products. In case of cigarettes, it would imply having a particular rate for cigarettes of all characteristics. In case of the Non-uniform tax rates, different tax rates are imposed on products of different characteristics.26 The differentiated taxes can be based on the retail price, cigarette length, filtered vs non-filtered cigarettes, characteristics of the tip of the cigarette and so on. In Nepal, there are non-uniform specific tax rates for cigarettes which are based on the length of the cigarettes. Cigarettes of shorter length have a lower specific tax compared to cigarettes of longer length.

Some countries also impose a minimum specific floor on the tax rates. If an ad-valorem tax is less than a minimum specific excise floor, then the minimum specific floor excise rate would become the tax liability.27 This is generally combined with an ad-valorem tax. An ad-valorem tax on a low price does not have a significant impact on the price. For instance, a 50% imposition of ad valorem tax on Rs. 1 will only increase the price to Rs. 1.50. This will not have a significant effect on the affordability of cigarettes. Therefore, an effective specific minimum floor can bump-up the prices of cigarettes which have a very low price to a level which would ideally affect the affordability of the cigarette. In this example, the tax liability is Rs. 0.5 which is not a significant amount to affect affordability, then a minimum specific floor higher than the tax liability, say Rs. 2, could be imposed. This has a greater effect on affordability than the earlier tax liability of Rs. 0.5. Generally, this issue does not exist for specific excise taxes since these are a set monetary value.

In the following section, we intend to elaborate how these taxes are imposed in different countries. By learning from the experiences of different countries, we will come-up with a best practice policy recommendation which would suit the Nepalese context.

23 Government of Nepal, Excise Duty Act (2002)24 World Bank Group (2018), “Economics of Tobacco Taxation Toolkit”, pg 1325 Ibid, pg 1326 Ibid, pg 1427 Ibid, pg 15


SECTION 1

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A review of International Experiences

Implementing an effective tobacco tax policy is a tricky affair. While policies might appear to be theoretically sound, there are unpredictable real-world issues which often make taxing tobacco complicated. Therefore, it is essential for us to study the experiences of different countries to learn their shortcomings. The reviews of six different countries are summarized below. In this review, we have tried to focus on key aspects of the tobacco tax experience in these countries to help Nepal make informed policy decisions.

Table 1: Summary of International Experiences

Type of Tax (Most Recent) Key Lessons

Myanmar

Non-uniform specific taxes differentiated on the basis of retail price

2016 reforms moved from a uniform ad-valorem tax to specific taxes based on cigarettes prices. Despite the reform effort, there were persistent shortcomings:1) The percentage of tax out of retail price remained low2) Increased complexity due to the non-uniform structure

Kenya

Non-uniform specific taxes differentiated on the basis of ex-factory price and ciga-rette characteristics

The Kenyan experience is a lesson on developing politically palatable reform strategies. A uniform specific tax, in line with international best practice, was proposed in 2015. How-ever, given the drastic departure from the existing system, the proposal was rejected in parliament on the grounds that it adversely affected the poor.

Bangladesh

Non-uniform ad-valorem tax on the basis retail price

Evidence from Bangladesh shows that due to the significant difference in tax rates of the lowest tiers vis-à-vis the upper tiers, people started to substitute from upper tiers to the low-est tier cigarettes, which contributed to increase in overall cigarettes consumed.

Brazil

A mixture of 5 different taxes based on a percentage of the retail price

Despite having a complex tax system consisting of 5 different taxes, Brazil has been successful in reducing consumption of cigarettes. One of the reasons is that all the 5 different taxes are paid by one taxpayer -- the manufacturer or importer.

Serbia

Mix of specific and ad-va-lorem tax (uniform)

Serbia has a combination of specific and ad-valorem tax. They have managed to increase taxes quite significantly as a percentage of retail price and the tax policy has been effective in reducing tobacco consumption and increasing government revenue.

Vietnam

Uniform Specific tax based on ex-factory price

Vietnam applied a 70% tax on ex-factory price. Because this was based on the price when distrusted from producers to wholesalers it worked out as only 28.1% of retail price. The low and stagnant tax rate meant that there was no fall in prevalence. In this instance, tax should have been applied to the retail price, or a much higher rate applied to the ex-fac-tory price.

SECTION 2

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2.1 Myanmar – reform, but unlikely to be ineffective?

Key takeaways from Myanmar

• Prevalence rates historically high and taxes are low• Cigarettes and Cheroots were becoming more affordable in the years preceding 2016• Reforms were implemented in 2016, but they have complicated the tax system and still significantly

under-tax tobacco

Context: prevalence rates and affordability

The prevalence rate of tobacco has remained high since 2004. The percentage of people using smoked tobacco daily was 24.4% in 2004 and while it declined to 16.7% in 2009, it then increased again to 20.7%, in 2014.28 Among all the users of smoked tobacco, merely 28.1% use manufactured cigarettes (2014). Cheroots, a type of cigar, are much more widespread. It is therefore essential to understand taxation of tobacco of cheroots and manufactured cigarettes separately.

There is also evidence that cigarettes became more affordable in the pre-2014 period which could explain the increase in its prevalence. On one measure between 2010 and 2014 there was around a 30% reduction in the share of GDP per capita required to buy 100 cigarette packs. In this study, this was the largest increase in affordability in the region.29

Tax structure: flawed 2016 reforms?

Myanmar’s tax structure did not change significantly for around two decades between 1995 and 201530, but in 2016 some reforms were introduced. The main reform was a shift from ad valorem tax to specific tax. Before 2016 the policy position was a uniform ad-valorem tax – in 2015 this was 120%. But from 2016 onwards the new policy was an excise tax with four tiers. The tiers were based on the ex-factory price, which is the price before being distributed out from the factory.31 The table below shows the details of the changes in the tax structure over time, with the key change coming in 2016.

28 World Bank Group (2019), “Myanmar: Overview of Tobacco Use, Tobacco Control, Legislation and Taxation”29 “WHO report on the global tobacco epidemic”, 2015 – reported in Maximising Tobacco Tax Reform in Myan-mar: policy recommendations from the Southeast Asia Tobacco Control Alliance (2017)30 World Bank Group (2019), “Myanmar: Overview of Tobacco Use, Tobacco Control, Legislation and Taxation”, pg 1231 Ibid., pg 12

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Table 2: Myanmar Tobacco Taxation – 2016 reform moving from ad valorem tax to tiered excise tax structure

2011 2012 2015 2016 2017 2018 2019

Cigarettes 75% 100% 120%

Tax (Ks) per 1 stick for cigarettes with the price for a pack with 20 sticks:

upto 400Ks 3 upto

400Ks 4 up to 500Ks 4 up to

600Ks 6

401-600 8 401-600 9 501-700 9 601-800 14601-800 12 601-800 13 701-900 13 801-1000 19

801Ks and more 15

801Ks and

more16 901Ks

and more 16 1001Ks and more 21

Tobacco 25% 50% 60% 60% 60% 60% 60%

Cigars, pipe tobacco, be-tel chewing preparation

20% 50% 60% 60% 80% 80% 80%

Cheroots 10% 50% 60% 60%

price up to 10 Ks

0.5 Ks

per 1 stick 0.25 Ks per 1

stick0.50 Ks per 1

stickprice 11 Ks and more

1 Ks per 1 stick

Source: World Bank Group (2019), “Myanmar: Overview of Tobacco Use, Tobacco Control, Legislation and Taxation”

Table 2 shows that in 2016, for a pack of up to 400 Kyats (Ks) the tax per cigarette was 3 Ks, for a pack of price between 401 to 600 Ks the tax per stick was 8 Ks, for a pack of price of 601 to 800, tax per stick was 12 Ks and for a pack of more than 801Ks and more the tax per stick was 15 Ks. By 2019 these per cigarette excise tax rates had increased to 6 Ks, 14 Ks, 19 Ks and 21 Ks respectively. Another way of presenting this is to look at the percentage of retail price represented by tax. In 2019, for the cheapest tier of cigarettes tax was around 20% of the retail price and up to 42% for the highest tier. We have summarized the taxes as a percentage of prices in the following table from 2016 onwards.

Table 3: Percentage of tax out of retail price is quite low even post reform

2016 2017 2018 2019

Cigarettes up to 400 Ks 15% 20% 16% 20%401-600 Ks 26.67% to 40% 30% to 45% 25.71% to 36% 35% to 46.67%601-800 Ks 30% to 40% 32.5% to 43.33% 28.89% to 37.14% 38% to 47.5%

801 Ks and more at least 37.5% at least 40% at least 35.56 at least 42%Cheroots

60%Price Up to 10 Ks: 5%

0.25 Ks per stick 0.5 Ks per stickPrice over 11 Ks: 9.09%

Source: Author’s Calculation based on Table 2

The tax of cheroots was also changed from ad valorem to specific excise tax. In 2017, a differential specific tax

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on cheroot was imposed. The tax was 0.5 Ks per stick for price up to 10 Ks. For price over 11 Ks, tax per stick was 1 Ks. In 2018 a uniform specific tax was imposed of 0.25 Ks per stick and it was increased to 0.5 Ks per stick in 2019. This represents a very low tax rate.

What potential impact on prevalence?

The World Bank estimate that following the tax changes in 2016 affordability of cigarettes declined.32 This may have resulted in some decline in cigarette consumption. However, there have not, since 2014, been any reliable surveys on prevalence rates so we do not know if the tax changes have reduced smoking rates. However, there is reason to be skeptical about whether the changes will have been effective. This are for several reasons:

• This still left overall tax levels low at 20% of retail price for the cheapest cigarettes and for the highest tax band of cigarettes it was around 47.5%, compared with the WHO guidance of 70%.

• The reforms created more complexity, with the introduction of tiers, which is not considered good practice because of increased price variability in the cigarette market and possibilities of repositioning of brands to lower tax tiers to avoid paying higher taxes.

2.2 Kenya: A political lesson in tobacco tax policy

Key Takeaways from Kenya

• Consumption of cigarettes in Kenya have increased quite significantly since the 2000s. In 2015, preva-lence of tobacco use was 13.3%

• Cigarettes have become more affordable over time• But politicians were not receptive to drastic reform measures• Minimum specific floor has resulted in under-reporting of retail price to avoid paying higher tax• The taxation policy has been ineffective in reducing demand of cigarettes and the prevalence rate

Context: Prevalence and Affordability

The prevalence of tobacco usage in Kenya is 13.3% according to the 2015 STEPS survey.33 Among tobacco users, 10.1% use smoked tobacco whereas 3.6% use smokeless tobacco. When we consider one measure of the affordability of cigarettes, which is GDP per capita/cost of 100 cigarettes, cigarettes have become more affordable. This can be observed in the following diagram.

Figure 1: Cigarettes have become more affordable in Kenya (1999- 2013)

Source: Nargis et. al. (2015)

32 Source: World Bank Group (2019), “Myanmar: Overview of Tobacco Use, Tobacco Control, Legislation and Taxation”33 Unfortunately, this is the only STEPS survey that WHO has conducted in Kenya. This will prohibit us from doing an intertemporal analysis of the effectiveness of tobacco policy and prevalence of tobacco

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The increase in the affordability of cigarettes reflects weak taxation policy in Kenya. In the following figure, one can observe the real price of cigarettes (the red line) have declined and consequently, the number of cigarettes consumed per adult (the green line) has increased since the 2000s.

Figure 2: Average price per pack of cigarettes (KShs.) in current prices, 2013 constant prices and per adult annual consumption of cigarettes in Kenya, 1999-2013


Tax Policy in Kenya

Kenya has undergone a number of changes in tobacco taxation since 2003. We have summarized the key features of the tobacco taxes in Kenya since 2003, in the following table.

Table 4: Tobacco taxes in Kenya

Year Tax type Features

2003-2007Specific tax structure differentiated by retail price Higher priced cigarettes have higher taxes

2008-2011

Specific tax structure based on prices and pack characteristics

Tax tiers were based on both retail price and pack characteristics such as plain, soft cup and hinge lid cigarettes.

2012Minimum Specific floor with ad-valorem tax

Single tax rate of KShs 1200 per 100 cigarettes (KShs 24 per pack) or 35% of retail selling price whichever is the highest. There was a Value Added Tax (VAT) of 16% on the producer price.

Problems:There were issues regarding under-reporting since the reported price generally tended to cluster around the minimum specific floor.

2015

Specific tax structure based on prices and pack characteristics

Policy reverted back to the pre-2012 model following the rejection of a uniform specific tax proposed in parliament.

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The minimum specific floor introduced in 2012 had distortive effects on the market as prices clustered around the price floor. In 2015 tax policy in Kenya reverted back to the non-uniform specific taxes as shown in the following table. The tiers of cigarettes are differentiated on the basis of cigarette characteristics and price of cigarettes. For the lowest tier, plain cigarettes or cigarettes with ex-factory selling price of up to KShs. 900 per thousand cigarettes. Furthermore, for cigarettes with hinge lid or with ex-factory price of KShs 4750, the tax is KShs 2800 per thousand cigarettes.

Table 5: Rates of excise duty (KShs. Per 1000) on cigarette sales in Kenya, 2015

Band Description Excise (KShs. Per mille)

APlain cigarettes or cigarettes with ex-factory selling price of up to KShs. 2750 per mille 900

BSoft cup cigarettes with ex-factory selling price of KShs. 2751 to KShs. 3750 per mille 1200

CSoft cup cigarettes with ex-factory selling price of KShs. 3751 to KShs. 4750 per mille 1800

DHinge lid cigarettes or cigarettes with ex-factory selling price of more than KShs. 4750 2800


A political lesson for tobacco tax policy

Before returning to the pre-2012 tax system in 2015, the government attempted to introduce a uniform specific tax of KShs 2500 per thousand cigarettes. This was rejected in parliament due to concerns that it would adversely affect mostly poorer smokers. Instead, Kenya reverted to a tax system similar to that of 2010. Nargis et. Al. (2015) estimated that the introduction of a uniform specific tax would have affected premium brands by 1%, mid-price brands 37% and economy brands 81%. The Kenyan experience gives us an important lesson on how to implement policy reform. Changes need to be politically palatable and avoid an unexpected radical reform implemented in a short period of time. One way to manage this issue is to phase-in a policy over a number of years. For instance, instead of abruptly introducing a uniform tax (which has been identified as a best practice), this could be achieved by gradually reducing the difference between the different tiers over a few years’ time and finally collapsing the difference between them.

2.3 Bangladesh: A case of a tax wedge

Key Takeaways from Bangladesh

• Prevalence rate of smoked tobacco has declined from 23% in 2009 to 18% in 2017• But there is a significant difference in tax rates between the lower brands and the upper brands• Overall consumption of cigarettes has increased mostly because of substitution towards low end brands

Prevalence and Affordability

The prevalence of tobacco products in Bangladesh has declined slightly since 2009. Overall prevalence of tobacco has decreased marginally from 43.3% in 2009 to 35.3% in 2017.34 The prevalence of smoked tobacco

34 This is based on the GATS survey of 2009 and 2017

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has been 23% in 2009 and has marginally declined to 18% in 2017. Despite this decline, prevalence of tobacco in Bangladesh is very high in comparison to other countries that we have reviewed.

The absolute number of cigarettes consumed has also increased.35 This has occurred despite the overall affordability of cigarettes declining. Nargis et. Al. (2018)36 show that based on one measure of affordability, cigarettes have become less affordable from 2009 to 2015, by around 2.7%. However, when we examine this further, cigarettes in the lower tier have actually become more affordable. On the other hand, cigarettes categorized as premium, high and medium brands have become less affordable in the aforementioned period. Let us explore where taxes fit into this.

Tax in Bangladesh:

Bangladesh applies a non-uniform ad-valorem excise tax based on retail price. The rate of ad valorem is higher for higher priced cigarettes compared to the lower priced cigarettes. This is summarized in the table below.

During this period there has been considerable difference between the lowest tier and the upper tier. Total tax out of retail price for the lower tier cigarettes was 47% of retail price in 2006/07 and 54% in 2014/15. However, the medium, high and premium tier cigarettes had a high total tax share as a percentage of retail price: 67%, 70% and 72% respectively in 2006/07 and 75%, 76% and 76% in 2014/15.

In 2015/16 the medium tier was collapsed upwards into the high tier, and in 2017/18 taxes on the lowest tier increased bringing tax out of retail price to 68% – closer to the high and premium tiers which were 78% and 80% respectively.

Table 6: Tiered Tax system of Bangladesh. We see a significant difference between the rates of the lower tier tax band and the higher tax bands

Lower Tier Medium Tier High Tier Premium Tier

Total Tax Share out of Total

Price

Excise Tax out of Total

Price


Price


Price


Price


Price


Price


Price2006-07 47 32 67 52 70 55 72 572007-08 47 32 67 52 70 55 72 572008-09 47 32 67 52 70 55 72 572009-10 47 32 67 52 70 55 72 572010-11 48 33 68 53 71 56 73 582011-12 51 36 70 55 73 58 75 602012-13 54 39 71 56 74 59 76 612013-14 54 39 71 56 74 59 76 612014-15 58 43 75 60 76 61 76 612015-16 64 49 NA NA 77 62 79 642016-17 66 51 NA NA 78 63 80 652017-18 68 53 NA NA 78 63 80 65

Source: Nargis et. Al (2019), ‘A Decade of Cigarette Taxation in Bangladesh, Lessons Learnt for Tobacco Control’

35 One possible reason for this could be that the overall adult population has increased during that time period36 https://tobaccocontrol.bmj.com/content/tobaccocontrol/28/Suppl_1/s20.full.pdf

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Despite the seemingly high tax on cigarettes, there are some key caveats of the Bangladesh tax policy that require attention.

Substitution towards lower priced cigarettes

In table 6 we observe that the difference in excise tax rate (and tax as a share of total price) between lower tier and the three higher tiered cigarettes (medium, high and premium) has historically been high.

The effect of this can be seen in the figure below. From 2006-07 to 2016-17, the overall sales of cigarettes have increased from 46 billion to 84.3 billion cigarettes. This was primarily because of a 410% percent in sales of the lowest brand, i.e. from 13.1 billion to 66.8 billion cigarettes.

Figure 3: Tax-paid sales of all brands and low-price brands of cigarettes in Bangladesh from 2006-07 to 2016-17

Source: Nargis et. al. (2019), ‘A Decade of Cigarette Taxation in Bangladesh, Lessons Learnt for Tobacco Control’

One can observe in the following chart, that the market share for lower tier cigarettes increased significantly from around 28% to 79% from 2006/07 to 2017/18.

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Figure 4: Market shares of low-, medium-, high- and premium-tier cigarettes brands in Bangladesh from 2006-07 to 2016-17

Source: Nargis et. al. (2019), ‘A Decade of Cigarette Taxation in Bangladesh, Lessons Learnt for Tobacco Control’

The difference between the lower and the higher tiered has resulted in a wedge between the prices of these tiers because of which smokers substitute towards the lower tiered brands. Furthermore, a lot of the cigarettes of the higher tiered cigarettes have rebranded and priced their cigarettes such that they fall in the lower tiered category to avoid paying the higher taxes. The considerably lower taxes on the lowest tier of cigarettes has also contributed to them being more affordable from the periods between 2009 and 2015.

A key lesson: Reduce differences in taxes between different tiers

In the case of Bangladesh, while tax as a percentage of retail price is quite high overall, people have switched to lower brands increasing overall consumption of cigarettes. As far as best practice is concerned, there should be a reduction in the difference between the different tiers to discourage such kind of substitution. This is a key lesson for tax policy.

2.4 Brazil- an effective tobacco tax policy

Key Takeaways from Brazil

• Prevalence rate of smoking and consumption of cigarettes have declined significantly • Cigarettes have become less affordable over time• Despite a complex tax structure, a high percentage of tax out of retail price for cigarettes• Burden of paying the entire taxes falls on one tax player which reduces tax leakages

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Declining consumption of cigarettes and prevalence rate

Brazil has been quite successful in reducing the prevalence and consumption of tobacco products. Smoking prevalence among adults decreased from 35% in 1989, to 18% in 2008 to around 10% in 2017.37 Furthermore, we can see in the table below that there has been considerable decline in the absolute consumption of cigarettes. In 2005, 111.8 billion cigarettes were consumed and this declined quite significantly to 48.2 billion by 2017.38

There has been a considerable increase in the average price of cigarettes, from R$ 2.14 in 2005 to R$ 7.65 per pack. In the World Bank Group (2019) report39, based on an affordability index, the tobacco taxes have made tobacco less affordable. This suggests the considerable decline in consumption of cigarettes is reflective of the effective tobacco tax policy.

Table 7: Average cigarette price, consumption and market size of cigarettes

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Average price, R$ per pack of 20 cigarettes

2.14 2.38 2.61 2.79 3.54 3.71 3.78 4.77 5.5 5.87 6.35 7.37 7.65

Consumption (billion cigarettes)

111.8 111.2 110.7 105.9 97.3 97.0 97.4 89.0 75.9 72.4 63.0 53.1 48.2

Market, billion R$ 12.0 13.2 14.4 14.7 17.2 18.0 18.4 21.2 20.9 21.2 20.0 19.6 18.4

Source: World Bank Group (2019), “Brazil: Overview of tobacco use, tobacco control legislation, and taxation”

Tax policy – effective despite being complex

Brazil has a mixture of taxes imposed on cigarettes. They have four federal level taxes and one subnational tax. 40Let us categorize them:

Industrial Products Tax (IPI)41 consists of two rules, general rule and special rule. Tax payers have the option of choosing between the two tax rates. The general rule is an ad valorem tax which equates to an effective tax rate of 45%.42 The special rule is a mixture of ad valorem and specific tax. Under the special rule, the effective tax rate is 40%.43

Of the 21 cigarette suppliers in Brazil (which consists of both producers and importers), all of them chose the special rule because of the lower effective tax.

37 http://documents.worldbank.org/curated/en/576421560802645093/pdf/Brazil-Overview-of-Tobacco-Use-To-bacco-Control-Legislation-and-Taxation.pdf38 World Bank Group (2019), “Brazil: Overview of Tobacco Use, Tobacco Control, Legislation and Taxes”39 ibid40 Ribeiro L and Pinto V (2019), “Accelerating Effective Tobacco Taxes in Brazil: Trends and Perspectives”41 We use IPI as its abbreviation because its full form in Portuguese is Imposto sobre Produtos Industrializados, IPI and that is used conventionally42 The general rule is calculated on 15% of the selling price. The tax rate is 300% which is imposed on 15% of the selling price. Ultimately, the tax out of retail price is 45%.43 The special rule consists of a tax of 15% of selling price plus an ad valorem tax of 66.67%. If one adds the specif-ic and ad-valorem tax, the effective tax according to this rule is 40%.

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Table 8: IPI taxes on cigarettes from December 2011

Fiscal Rule

General rule Special rule

Ad-valorem Ad-valoremSpecific

Soft pack Hard pack

12/01/2011 to 04/30/2012 Tax rate: 300%

Calculation Base:15% of the selling price

Effective rate:

45%

0.0% R$ 0.80 R$ 1.15

05/01/2012 to 12/31/2012 40.0% R$ 0.90 R$ 1.20

01/01/2013 to 12/31/2013 47.0% R$ 1.05 R$ 1.25

01/01/2014 to 12/31/2014 54.0% R$ 1.20 R$ 1.30

01/01/2015 to 04/30/2016 60.0% R$ 1.30 R$ 1.30

05/01/2016 to 11/30/2016 63.3% R$ 1.40 R$ 1.40

As of 12/01/2016 66.7% R$ 1.50 R$ 1.50

Source: Ribeiro L and Pinto V (2019), “Accelerating Effective Tobacco Taxes in Brazil: Trends and Perspective”

As of July 2009, tax for social integration and financing (PIS)44 is calculated as 0.65% x 3.42 x retail price and tax for social security and financing (COFINS)45 is calculated as 3% x 2.9169 x retail price.

Table 9: PIS and COFINS duties on tobacco suppliers

Validity PIS (R$) COFINS (R$)

Until 02/28/2006 0.65% x 1.38 x retail price sales (R$) 3% x 1.18 x retail price sales (R$)

03/01/2006 to 06/30/2009 0.65% 1.98 x retail price sales (R$) 3% x 1.69 x retail price sales (R$)

As of 07/01/2009 0.65% x 3.42 x retail price sales (R$) 3% x 2.92 x retail price sales (R$)

Source: ibid.

After adding the above 3 taxes and an import duty, there is an additional ICMS46 tax which is imposed at the sub-national level. In the table below, we can see the effective tax rate for the different states in Brazil. While it appears that the tax structure in Brazil is quite complex, it translates into a high effective tax rate.

One of the reasons why this complex tax system appears to work is because all the responsibility of paying the entire tax falls on to a single taxpayer: either on the producer or the importer of the tobacco products. Furthermore, as can be observed in the table below, the effective tax rates in most of the Brazilian states for the most sold brand is above the WHO standard of 70%.

44 Full form of PIS is Programa de Integração Social (Portuguese)45 Full form of COFINS is Contribuição para o Financiamento da Seguridade Social (Portuguese)46 Full form of ICMS is Imposto sobre comercialização de mercadoria e serviços (Portuguese)

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Table 10: Effective tax rate for the most sold brand (Derby) when the special rule is applied

State Special Rule

DF 78%MT 77%RO 76%SP 71%AL 73%PB 75%AC 72%AM 72%BA 72%CE 74%MS 73%PA 72%MA 73%PE 73%PI 70%PR 69%RJ 72%RN 71%TO 71%SE 70%GO 70%RS 68%ES 69%

MG 69%AP 67%RR 69%SC 66%

Source: ibid.

2.5 Serbia: a win-win scenario

Key Takeaways from Serbia

• Both the prevalence rate and the consumption of cigarettes have declined• A combination of ad-valorem and specific excise tax has increased the price of cigarettes and reduced

affordability• Revenue has increased five-fold from 2005 to 2017• Overall, a win-win scenario from the standpoint of revenue and public health

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Declining prevalence and tobacco consumption

The prevalence rate of tobacco consumption between 2000 to 2016 has experienced a considerable decline from around 48% to 39%. The consumption of cigarettes has almost halved in from 2005 to 2017, from 1290 million to 671 million annually.47

Figure 5: Declining prevalence of smoking in Serbia

Source: Institute of Economic Sciences (2018)

An effective mixed excise tax

Serbia has a very effective taxation of tobacco which combines a specific and ad-valorem tax. The ad-valorem tax is based on the retail price. The specific tax is paid per 20 cigarettes. The evolution of Serbia’s tobacco tax system can be seen in the figure below.

Figure 6: Specific and ad-valorem excise in Serbia (2001-2018)


Pre-2004, there was only a specific tax on cigarettes. When the ad-valorem tax was introduced in 2005, the plan was to gradually increase it, however it has remained around 33% since 2012. Meanwhile, the specific tax has increased quite significantly from 2010 onwards. While the specific tax per cigarette in 2010 was around RSD 0.1 per cigarette, it has increased to around RSD 0.6 around 2018. The overall combined effect of both the taxes (including VAT) on the price of cigarettes is quite significant. The percentage of these taxes out of overall price is 80% which is above the WHO recommended threshold.

47 Institute of Economic Sciences (2018), “Accelerating Progress on Effective Tobacco Tax Policies in Low- and Middle-Income Countries”

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Of course, the effect of these taxes varies with the different price of cigarettes. The price of cigarettes varies from RSD 147 for the lower tier brands to RSD 235 for the upper tier brands. Tax as a percentage of retail price is higher for the lower tiered brands compared to the upper tiered brands. For the former taxes constituted around 70.2% and for the latter it constituted around 46.1% of the retail price, excluding VAT. When one includes VAT, overall tax constitutes around 86.8% of overall retail price for the lower tiered brands and 62.8% for the upper tiered brands.

We can see the effectiveness of this tax policy in the figure below. As the weighted average price (blue curve) increases there is a significant decline in the number of cigarettes consumed.

Figure 7: Consumption and weighted average price of cigarettes in Serbia (2005-2017)


Significant increase in government revenue

With the increase taxes and a corresponding decline in the consumption, the government revenues from taxes from cigarettes have risen considerably. Between 2005 and 2017, the absolute value of the revenue generated by tobacco excise duty has increased by around 5 times. There has also been an increase in the share of tobacco excise duty as a proportion of overall public revenues from around 2.5 % in 2005 to around 5% in 2017. Similarly, tobacco excise duty as a proportion of total GDP of Serbia has almost doubled (although has remained fairly steady since 2010) from around 1% of GDP in 2005 to around 2.2% of GDP in 2017. The case of Serbia is a very good example of how an increase in taxation has both a substantive increase in government revenues and a fair reduction in the prevalence of tobacco, i.e. a win-win scenario for both the government, health sector and the general population.

Figure 8: Increasing revenue from tobacco excise duty to Serbian public revenues 2005-2017


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2.6 Vietnam: A lesson in assessing the tax base

Key Takeaways from Vietnam

• The Prevalence rate of smoking has remained stagnant since 2010• Cigarettes have become more affordable over time• While the tax rate appears to be quite high, the tax base is the ex-factory price making the overall effect

on taxes lower than it appears• Overall, the tax policy appears to have been ineffective in reducing affordability and discouraging

tobacco use

Prevalence and Affordability

The prevalence of tobacco has remained fairly stagnant from 23.8% in 2010 to 22.5% in 2015. Based on one measure of affordability,48 cigarettes have become considerably cheaper in real terms in the last decade. Let us explore why this might be the case.

Low effective tax

Vietnam has a uniform ad valorem tax system. The base of the tax is the ex-factory price, which is the price of the cigarette at the factory (before they have been distributed to the wholesalers). There is an additional VAT which is imposed on cigarettes.

The ad-valorem cigarette tax in Vietnam has experienced some changes since 2006. It was 55% in 2006, and it was increased to around 65% on 2008 and remained so till 2016. In 2017, the tax was increased to 70%. While the tax percentage seems high, the tax base is the ex-factory price and not the retail price. Therefore, percentage of tax out of retail price is quite low at around 28.1% in 2016. The tax base and the price including the tax is illustrated in the figure and the table below.

Figure 9: Average tax base and excise duty added to the per pack of cigarettes in Vietnam (inflation adjusted), 2006-2016

Source: Tobacconomics (2018), “Increasing the tobacco tax rate in Vietnam is not enough: Tobacco tax structures need reforms too”

48 https://tobacconomics.org/wp-content/uploads/2018/08/Vietnam-Paper-Policy-Brief-FINAL.pdf

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A key lesson from Vietnam is that the base of ad-valorem tax should be considered. In case where the base of tax is the ex-factory price it would be ideal to consider the effective tax out of retail price. For instance, instead of having a 70% of ex-factory price one can prescribe a higher percentage, say 140%. It is only then that taxes can be effective in making tobacco less affordable.

Table 11: Breaking down the price of a pack of the most sold brand of cigarettes in Vietnam (2016)

VND per pack Percentage of retail

a Pre-tax ex-factory price 8028 40.10%

b Excise tax (70% of a) 5620 28.10%

c VAT (10% of a+b) 1394 7.00%

d Compulsory levy (1.5% of a) 120 0.60%

e Wholesale and retail margin 4838 24.20%

f Retail price 20000Source: ibid.

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Taxation of Tobacco in Nepal

Where has Nepal gone wrong in its taxation of tobacco?

• The prevalence of smoking has remained fairly stagnant• Tax as a percentage of retail price is quite low at around 27%• Nepal has a complex non-uniform tax system for tobacco products• By one measure, cigarettes have become more affordable in the recent years• Excise duty collected from tobacco products quite insignificant compared to the government revenue

3.1 Overview of Nepal’s tobacco taxation system

Tobacco use is a big issue in Nepal. The NDRI survey which was conducted in December 2019/January 2020 shows that the prevalence rate of tobacco is 31.7%. In this section we examine the tax structure of Nepal and identify where improvements can be made to discourage tobacco use.

Nepal has a differential specific excise duty on cigarettes. The basis of the differential tax is the length of the cigarettes. They are taxed per 1000 cigarettes. Every year, the Arthik Bidhayek is published where these excise duties are stated. In the table below, tax rates for the different products are listed.

Table 12: Structure of tobacco taxes in Nepal

Source: Aarthik Bidhayek (Various Years)*Data for the years 2009, 2012 and 2015 was not available

The different tiers of taxes on cigarettes are, length up to 70mm, length from 70mm to 75mm, length of 75mm to 85mm and length above 85mm. Before 2014, the category of cigarettes without filter was only for length less than 70mm. From 2016 onwards, all cigarettes without filter were put into one category.

In 2019, tax as a percentage of retail price is around 27%49 . This figure is calculated by the WHO and is based on the tax component of Nepal’s most popular brand. This 27% has two components, the excise duty on cigarettes plus Value Added Tax (VAT) of 11.5%. When we subtract the VAT component from the total tax, the specific excise duty on total retail price is merely 15.5%.


SECTION 3

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Let us consider the specific excise tax for the 2019. There is considerable difference between the tax of the different tiers of cigarettes. For instance, for the unfiltered cigarettes the specific excise tax is Rs. 495 per thousand cigarettes. For the filtered cigarettes, the specific excise tax is Rs. 1135, Rs. 1475, Rs.1920 and Rs. 2715 (per thousand cigarettes) respectively for length up to 70mm, length from 70mm to 75mm, length of 75mm to 85mm and length above 85mm respectively. This is illustrated in the following figure. Given the significant difference in tax rates between the tiers, it becomes quite easy for cigarette companies to reposition themselves from tier A to tier B just to pay a lower tax rate. Moreover, it is likely that a high-priced cigarette can be positioned in a lower tax tier. This can severely limit the effectiveness of tax policy in terms of reducing consumption and prevalence of tobacco use.

Figure 10: Significant difference between the different tax tiers for cigarettes (2019)

Source: Arthik Bidheyak

In real terms, the taxes of tobacco have not increased significantly in the last decade. As can be seen in the following table, from 2010-2014 the increase in real tax of tobacco has been quite insignificant for all of the products. There has been a relatively higher increase in real taxes in the last three years.

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Table 13: Real tax (adjusted for inflation) of tobacco products

2010 2011 2012 2013 2014 2015 2016 2017 2018

1 In up to 70 mm length Unfiltered 223 214 247a Without Filter 210 213 209 207b With Filter 445 451 458 462 475 491 5652 In more than 70 mm up to

75mm length (with filter)570 578 585 590 611 638 735

3 In more than 75mm up to 85mm length (with filter)

730 740 750 756 797 832 958

4 In more than 85mm length (with filter)

950 963 1002 1029 1115 1174 1353

5 All kinds of Cigars 5 5 7 7 7 7 86 Bidi 50 50 46 49 50 48 497 Pipe Tobacco 575 570 537 562 602 576 6648 All kinds of Jarda Khaini and

Nash200 201 184 193 251 264 304

9 Packed Raw Chewable tobacco containing lime

130 132 123 129 137 145 167

Source: Author’s calculation using Arthik Bidheyak and World Bank data*Data for 2012 and 215 was not available

The increase in tax rates have superseded inflation in the last three years. But tobacco tax as a percentage of retail price is significantly below the WHO guideline of 70%. The fundamental problem with the tax rates in Nepal is that they start at a very low base. This can be observed in the following graph. Nepal has the second lowest tax as a percentage of cigarettes of the most sold brand (after Afghanistan) in South Asia.

Figure 11: Nepal has the second lowest tax as a percentage of most sold brand of cigarettes in South Asia

Source: WHO (2016)Note: The data for Bhutan was not available in the WHO database

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3.2 Affordability of Tobacco

When we compare the inflation with the change in price of tobacco products, it is clear that the price of tobacco products has increased quite significantly more than the Consumer Price Index (CPI). For instance, with a base year of 2008/09, the CPI has increased by 99.67 percent in 2017/18. However, the price of tobacco products has increased by 182.45 percent. Given that the price of cigarettes has increased by more than CPI, does that mean that cigarettes have become less affordable compared to other goods?

Table 14: Consumer Price Index Vs Price of Tobacco Products

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

CPI 100 109.52 120.03 129.88 142.74 155.76 166.94 183.47 191.65 199.67

Tobacco Products 100 112.50 127.64 141.59 161.06 191.35 240.38 258.65 268.27 282.45

Source: Economic Survey of Nepal (Various Years)Note: Base year is the year 2008/09

In table 15, we have used the Tobacco Affordability Index (TAI). The TAI is an index which captures the change in the average income in an economy50 and the change price of tobacco products. The affordability of tobacco products increases when the increase in average income is greater than the increase in the price of tobacco, i.e. when the TAI is positive. Conversely, when the increase in price of tobacco exceeds income (when the TAI is negative) then affordability of tobacco products declines.

TAI=(Income Increase /Consumer Price Index of Tobacco-1)x 100

From 2009/10, 5 out of the 9 years affordability has increased51 while 4 out of the 9 years the affordability has decreased.52 In the last two years in consideration affordability has increased quite significantly primarily because of the relatively little increase in the price of tobacco and a significant increase in GDP per capita.

Table 15: Change in Price of Tobacco, Change in GDP per capita and Tobacco Affordability Index

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Change in Price of Tobacco 12.50 13.46 10.92 13.75 18.81 25.63 7.60 3.72 5.29

Change in GDP per capita 20.11 14.48 11.95 11.27 15.95 8.00 4.82 17.13 11.47

Tobacco Affordability Index 60.91 7.59 9.38 -18.02 -15.19 -68.80 -36.58 360.72 117.00

Source: Economic Survey of Nepal (various years) and Author’s Calculation

Based on the change in prices of tobacco compared to CPI one could say that tobacco has become less affordable compared to other goods. However, if we examine the change in per capita GDP relative to change in price of tobacco, we can see that per capita GDP in the last two years has increased quite significantly more than theprice of tobacco (which is reflected in the TAI). Tobacco has become more affordable relative to people’s income.

50 To capture this, we have used GDP per capita51 That is 2009/10, 2010/11, 2011/12, 2016/17 and 2017/1852 That is 2012/13, 2013/14, 2014/15 and 2015/16

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3.3 Tax revenue from tobacco products

Despite relatively low increases in tobacco tax rates, revenue from tobacco tax has increased consistently over the last 5 years.

Table 16: Tobacco tax out of total revenue has been shrinking in the last decade53

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Percent increase in revenue from tobacco (%) 13.97 4.18* 33.70* 25.78 21.97 27.77Tobacco tax out of Excise Duty (%) 18.69 19.53 14.79 13.38 13.70 12.96 13.69Tobacco Tax out of total tax (%) 2.82 2.90 2.07 2.01 2.14 1.98 2.19Percentage of tobacco tax in total revenue53 (%) 2.54 2.59 1.81 1.76 2.11 1.80 1.93

Source: Author’s calculation using budget documents (various years)*2012/13 and 2013/14 percentage change are relative to 2010/11 and 2013/14 respectively because of the missing data

However, tobacco tax as a proportion of government revenue has declined over the past decade from 2.54% in 2009/10 to 1.93% in 2017/18. While there are countries like Brazil (0.18%), Ethiopia (0.44%), Uzbekistan (0.83%) and Mexico (1.37%) whose tobacco tax as a percentage of tax revenue is lesser than that of Nepal (2.19%), other countries such as Ireland (2.57%), Italy (2.63%), Mauritius (5.92%) and Ukraine (6.67%) have a higher share of tobacco tax out of tax revenue. Ukraine, which has 6.67% share of tobacco revenue, shows that there is potentially a lot of room to increase share of tobacco tax out of total tax revenue for Nepal.54

Table 17: Tobacco tax as a percentage of tax revenue

Country Year Income Level Tobacco tax as % of tax revenueBrazil 2017 Upper Middle 0.18%

Ethiopia 2017 Low Income 0.44%Uzbekistan 2016 Lower Middle 0.83%

Mexico 2017 Upper Middle 1.37%Nepal 2018 Low Income 2.19%

Ireland 2017 Upper Income 2.57%Italy 2017 Upper Income 2.63%

Mauritius 2017 Upper Middle 5.92%Ukraine 2017 Lower Middle 6.67%

Source: WHO data

Given low taxes, increasing affordability and low share of government revenue, we think there is a strong case to substantially increase Nepal’s tobacco tax rates.

53 Total Revenue = Tax Revenue + Non-Tax Revenue54 Note that it is recognized that the selection of countries is done based on the availability of data. The WHO data lacks comparable data on South Asian countries because of which we did not include them in this table.

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SECTION 4

Understanding how taxes affect tax administration, consumers and producers

In this section we attempt to examine the impacts the two different types of taxation – ad-valorem and specific taxes – have on consumers and producers. It is essential that we assess how these two taxes affect the market in order to suggest an effective tax policy of tobacco in Nepal.

Specific excise is a set monetary amount which is levied on a pre-determined unit (per weight, pack, piece and so forth). As discussed in section 3, this is the current method use to tax tobacco in Nepal.

Ad-valorem excise is levied as a percentage of price. This could be the retail price or the ex-factory price. In Nepal, the “Excise Duty Act 2002” states that excise duty in Nepal must be applied to the ex-factory price. We saw in the case of Vietnam that taxing the ex-factory price leads to a much lower tax as a proportion of retail price: the ad-valorem tax was 70%, which translated to 28.1% of retail price.

The choice of tax can affect three stakeholders: consumer, producer and the tax administration. Let us consider how they affect them.

4.1 Tax Administration

Tax Administration

Specific tax• Easy to administer

Ad-valorem• Difficult to administer and possibility of undervaluation of output by the producers

A specific tax is considered easier to administer as it is based on the volume of cigarettes. It is also not linked to price, and so there is no incentive to undervalue. An ad-valorem tax is based on the value of cigarettes sold. This is more difficult for tax administration to measure and creates an incentive for producers to undervalue their output to lower their tax bill. While an ad-valorem tax can be effective (which is explained in the following section), implementing it requires a high level of administrative capacity from the tax authorities.

4.2 Producer

Producer

Specific tax• An imposition of specific taxes would result in a higher increase in prices because of tax over

shifting• Could lead to diversification from the producers and could encourage producers to invest further

Ad-valorem• The increase in price will be relatively lower compared to specific taxes• Could discourage investment from the producers of tobacco

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The imposition of a specific tax would have a very different effect on the producer’s response compared to that of an ad-valorem tax. Let us examine the former first. Specific tax generally leads to higher retail prices. Under a specific tax, the net-of-tax price is retained by the tobacco industry which creates an incentive to increase the price as much as possible. This encourages investment in product differentiation, and the development of different brands of cigarettes – but generally leads to higher priced cigarettes.

Additionally, the addictive nature of cigarettes means that demand is inelastic. To certain extent producers can increase the price of cigarettes by more than the tax increase to generate more profit. For example, if the tax was Rs. 500 per thousand cigarettes or Rs. 0.5 per stick, producers could increase the price by Rs. 1 per stick. This is known as over-shifting.55

In the table below, we see some evidence of over-shifting in Nepal. While the taxes on tobacco products have increased mostly around 30 to 40 percent between 2012 and 2015, the change in price of tobacco during the same period is more at 60.60%.56 The extent of the over-shifting depends on the monopoly power of firm (which is dependent on the market characteristics) and the starting price and affordability of cigarettes.

Table 18: Percentage Change in Tax of Tobacco Vs Percentage Change in Price of Tobacco (A possible price over-shifting)

(Percentage change compared to

2009/10) 2012/13

(Percentage change compared to

2012/13) 2015/16CPI 30.34 28.54Tobacco 43.16 60.60GDP per capita 42.61 31.26 Cigarettes In up to 70 mm length Without Filter 29.52 With Filter 34.16 33.17In more than 70 mm up to 75mm length (with filter) 33.86 34.21In more than 75mm up to 85mm length (with filter) 33.84 36.75In more than 85mm length (with filter) 37.47 43.03All kinds of Cigars 80.00 33.33Bidi 20.00 40.00Pipe Tobacco 21.74 44.00All kinds of Jarda Khaini and Nash 20.00 75.00Packed Raw Chewable tobacco containing lime 23.08 43.75

Source: Author’s calculation using Economic Survey, World Bank Data and Arthik Bidhayek (Various Years)*Note: The percentage increase is relative to the years mentioned in the table

In a non-uniform system such as Nepal, the different tax tiers create further price gaps in the cigarette market. Such price gaps limit the effect of tax increases because they create opportunities for consumers to substitute between brands or types of cigarettes – for example “trading down” rather than quitting or reducing consumption.57 This limits the health impacts of tobacco tax.

55 Ibid, page 4456 Significant price over shifting was not observed between the years 2009/10 to 2012/13.57 https://cancercontrol.cancer.gov/brp/tcrb/monographs/21/docs/m21_5.pdf

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Tobacco producers with a portfolio of cigarette products can manage their price increases strategically. For example, they can over-shift in their premium brands and under-shift in their cheaper brands so that they remain unaffordable. This allows them to retain their consumer base whilst balancing their profit across their range of products.

Interestingly, in the case of Nepal Surya Company has a market share of around 70%58, and produces cigarettes from the cheapest brands (such as Pilot, Bijuli, Chautari and Khukuri) to high end brands (such as Surya light, Surya Red and Shikhar)59. The specific tax system in Nepal benefits Surya by allowing them to manage tax liabilities across their product portfolio.

Such level of diversification would not be possible under an ad-valorem tax. Let us suppose that there is an ad-valorem tax of 60%. When there is an ad-valorem tax, if firms want to innovate and increase investment, they might have to increase price. If a firm wants to increase their net-of-tax price by Rs. 1, they will have to increase prices by [1/(1-t)] to account for the ad-valorem tax – in this example by Rs. 2.5.60 60% of this increase, which is Rs. 1.5, would go to government in taxes leaving an increment of Rs. 1 in net-of-tax price. Because tax is linked to price under an ad-valorem system, firms have a reduced incentive to invest and the market is not as diversified as in a specific excise tax regime.

4.3 Consumer

Consumer

Specific tax• Under a uniform specific tax, lower priced brands would be affected more than higher priced

brands• The price ratio of the lower priced brands and higher priced brands shrink which could

discourage substitutability to lower priced brandsAd-valorem

• Higher priced brands are affected more in absolute terms• The price ratio of the lower priced brands and the higher priced brands are maintained and could encourage substitution from higher priced brands to lower priced brands

We will examine two ways in which the two types of tax would affect consumers differently.

A) Tax incidence on different priced cigarettes

A uniform specific tax would have a higher incidence on lower priced brands compared to upper priced brands. For example, Table 19 demonstrates the impact of a uniform specific tax set at Rs. 1340 per 1000 cigarettes across different priced brands.61 The list of cigarettes in ascending order from lowest priced cigarette (i.e. Bijuli) to the highest priced cigarette (Surya Legend Flt). In column (d) of the following table, we show the percentage

58 Page 1, https://www.academia.edu/10630441/CHAPTER-I_Profile_of_Surya_Nepal59 The knowledge of price of these products are based on our household survey and the fact that these are pro-duced by Surya is in the Surya website. [https://www.snpl.com.np/content/cigarette.html]60 For an elaborate discussion on this: Keen, M (1998), “The balance between specific and ad-valorem taxation”, Fiscal studies, Volume 1961 Note that this table is only for an illustrative purpose. We analyze under the assumption that all the cigarettes are under the same tax band (which is a realistic assumption). The excise duty of Rs. 1340 is the duty of the cigarettes of length 70mm to 75mm in the year 2018.

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of tax which constitutes the excise duty.62 We see that the tax on Bijuli is 34.90% (per stick) of the price whereas this decline as we move to higher priced brands. Tax as a percentage of price of Khukuri is 22.19%, Shikhar flt is 14.82% and Surya legend flt is 9.03%. A uniform specific tax would help to close the gap in prices by increasing the price of lower priced cigarettes more than a higher priced cigarette.

Table 19: Effects of a specific tax on cigarettes of various prices

(a) (b) (c) (b) + (c) (d)Pack (Retail Price)

Price Per Stick Tax Per Stick Price including Excise Tax

Percent of Excise Tax (%)

Bijuli 50 2.5 1.34 3.84 34.9Khukri 94 4.7 1.34 6.04 22.19Shikhar fit 154 7.7 1.34 9.04 14.82Surya legend flt 270 13.5 1.34 14.84 9.03

In case of ad-valorem tax, because the tax is a proportion of price, the absolute amount would be higher for higher priced brands compared to lower priced brands. For instance, if there is an ad-valorem tax of 10%, 10% of Rs. 2.5 would be Rs. 0.25 (per stick) which is lower than that of Surya legend flt, which would be Rs. 1.35 (per stick).

B) Price gap between cheap and premium brands

In case of an ad-valorem tax, the relative difference in prices between two different brands is maintained and in absolute terms, the price gap widens. This can be seen in the table below.

Table 20: Price Gap between brands of different prices are maintained in the case of an Ad-valorem tax

Price for single stick (Rs)

10 % of Price

Price after 10% tax

Ratio of the prices between two subsequent brands (before tax)

Ratio of the prices between the subsequent brands (after tax)

Bijuli 2.5 0.25 2.75Khukri 4.7 0.47 5.17 0.53 0.53Shikhar fit 7.7 0.77 8.47 0.61 0.61Surya legend flt 13.5 1.35 14.85 0.57 0.57

However, in case of specific taxes – assuming taxes are passed on to the customer one-for-one – the ratio of prices after tax of the lower and upper priced brands shrink. This can be seen in the table below. We can see that the ratio of the prices between Bijuli and Khukri before the specific tax was 0.53, whereas after tax the ratio between the price of the two brands shrinks resulting in Bijuli’s price constituting as a higher proportion of price of Khukri, which is 0.64. Similar observations can be made for other brands as well.

62 Note that the excise tax is on the ex-factory price. However, these are retail prices but would be a good proxy for the difference in ex-factory price among different brands.

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Table 21: Price gap between higher priced brands and lower priced brands shrink because of a specific tax

Price per stick (Rs)

Tax per stick

Price after specific tax

Ratio of Prices between the subsequent brands (before tax)

Ratio of Prices between the subsequent brands (after tax)

Bijuli 2.5 1.34 3.84Khukri 4.7 1.34 6.04 0.53 0.64Shikhar fit 7.7 1.34 9.04 0.61 0.67Surya legend flt 13.5 1.34 14.84 0.57 0.61

Consequently, in case of a uniform specific tax, consumers have less incentive to substitute to lower priced brands since the price ratio of the upper priced brands and the lower priced brands have is lower post tax. However, in case of ad-valorem the ratio of prices of brands are maintained post tax.

The benefits of a specific tax are undermined when the tax system is non-uniform, as is the case in Nepal.

4.4 Lessons for Nepal:

Based on the analysis of this paper and drawing on other country experiences, we have identified the following principals for effective tobacco tax policy that should be applied in Nepal:

• Specific taxes should be increased annually accounting for inflation and per capita income growth so that cigarettes do not become more affordable. An effective tobacco policy would ideally reduce affordability of tobacco over time.

• Specific taxes should be applied uniformly so that all cigarettes are taxed equally. A tax policy with multiple tiers creates opportunities for cigarette companies to reposition themselves to lower the tax band, and the wide range of taxes in the market reduces the impact of tax on consumption by allowing for substitution. In case of Nepal, it is possible for cigarette companies to reposition a cigarette to lower tax paying band by decreasing the length of the cigarette. A single specific tax would be more effective in raising prices and would be simpler to administer.

• Simplicity of tax collection is important. In the case of Brazil, while the tax structure seemed reasonably complex, the fact that the responsibility of paying the whole tax rested on a single taxpayer was effective. In the case of Nepal, it could be wise to adopt a similar system, especially in the currently evolving federal setup where the roles of the subnational governments are not very clear.

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Taxes and Tobacco: Findings from the Survey

Survey Analysis and Tax Policy

• Majority of the purchase of tobacco products are from the retail store which makes a significant proportion of the market subject to tax increase

• Around 51.3% tobacco users said they would stop consuming or reduce tobacco consumption because of a doubling of price of tobacco

• There is significant public support for increasing tobacco tax • The percentage of income spent on cigarettes and bidis is higher for the lower expenditure

quintiles compared to the higher expenditure quintiles and they are more likely to decrease consumption of cigarettes and bidis in response to increased prices

Who is responsible for reducing tobacco use?

Around half of people (46.6%) think it is the government’s responsibility to reduce tobacco use. Among those, 67.4% are tobacco non-users and 32.7% are tobacco users. Just under a third, 31.5%, say it is the individual and their family’s responsibility to reduce tobacco use while a one fifth (20.3%) believe it’s the responsibility of the tobacco companies63.

Figure 12: Most people think its government’s responsibility to reduce tobacco use

Most respondents are in favour of a tax increase

NDRI’s survey found high levels of public support for increased taxation on tobacco. More than three quarters (76%) of respondents said that the government should increase the tax rate in Nepal. Even in the poorest quintile, 63% of poorer Nepali’s agreed that taxes should be increased and only 22% disagreed.

63 NSEPT survey 2019/2020, Q86. Can you indicate who you think has the most responsibility to reduce tobacco use?

SECTION 5

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Table 22: Support for increase in tax

PercentageAgree 76.0

Indifferent 9.0Disagree 12.9

Don’t Know 2.1

While support for a tax increase in the Mountain region was lower than in the Hills and Terai it was still two thirds of people. Table 23: Geographical Region wise support for increase in taxes

Mountain Hill Terai

Agree 66.4 75.7 77.4Indifferent 13.5 10.2 7.2Disagree 18.7 10.9 14.3

Don’t Know 1.4 3.2 1.1

The percentage of people supporting a tax increase is high across all provinces. In Sudurpaschim, the province with the highest rate of tobacco use, support is extremely high at 97.2%. In Province 1, which has prioritized tobacco control, it is 83.5%. Even in Karnali, the province with the lowest support, 61.5% were in favour of a tax increase.

Table 24: Province wise support for increase in taxes

Province 1 Province 2 Bagmati Gandaki Province 5 Karnali Sudurpaschim

Agree 83.5 72.7 71.4 70.7 71.4 61.5 97.2Indifferent 10.0 7.0 10.7 10.8 9.0 17.3 1.1Disagree 5.7 20.0 16.8 15.8 15.9 11.4 1.5

Don’t Know 0.8 0.3 1.2 2.7 3.7 9.8 0.2

Younger people are the more likely they are to support an increase in tax on tobacco products but support is high across all age groups. 81.2% of people in the 18 to 30 groups supported an increase. This steadily declined as people got older. But even in the 60 plus group 63.5% would support a tax increase. While this older group were most likely to be against an increase, less than one in five people said they disagreed with more tax on tobacco.

Table 25: Age-wise support for increase in taxes

18-30 31-40 41-50 51-60 60+

Agree 81.2 77.4 74.5 69.5 63.5Indifferent 6.2 9.3 10.1 13.1 12.8Disagree 11.5 11.5 13.0 15.6 18.0

Don’t Know 1.1 1.8 2.4 1.9 5.7


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Just how popular this policy would be was shown by the 55% of tobacco users who were in favour of increasing taxes on tobacco. There was even stronger support from non-users with 85.8% saying they agreed with a tax increase. Less than a quarter of tobacco users disagreed with a tax increase on the products they use.

Table 26: Tobacco user vs non-user for support in increase in taxes

Non-user Tobacco User

Agree 85.8 55.0Indifferent 5.0 17.70Disagree 7.5 24.6

Don’t Know 1.7 2.8Total 100 100

People think tax out of retail price should be much higher than it is currently

When asked what the tax rate of tobacco products should be almost two thirds said it should be at least 40% of retail price or higher. More than a quarter felt it should be greater than 80%.

Table 27: What proportion of the retail price should go to the government as tax

Tax rate on Percentage

0 3.851 – 20% 9.04

21 – 40% 23.241 – 60% 26.0461 – 80% 12.7

More than 80% 25.18

Most tobacco products are bought from the retail shops making it taxable

More than 9 in 10 tobacco consumers said that they buy their tobacco from a nearby shop. Just 7.3% said that they buy it from the local market and 1.0% said that they get it from friends or neighbors. This was consistent across the different provinces. The lowest percentage of people who buy their tobacco from retail shops, still over three quarters at 77.5%, was in Gandaki province. In Karnali province everyone bought their tobacco from a shop. With such a significant majority of tobacco users buying from shops and local markets, a tax increase on tobacco could be simply and effectively introduced.

Table 28: Percentage of tobacco users buying from retail shop is highest

Tobacco buying places Percentage

Retail Shop 91.6Local Market 7.3

From Friends/Neighbors 1.0

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Table 29: Province wise division of where people get their tobacco products

Tobacco buying places

Province 1

Province 2

Bagmati Gandaki Province 5

Karnali Sudurpaschim

Retail shop 93.58 88.83 89.68 77.53 95.27 100 95.38Local market 6.17 8.04 8.76 18.89 4.73 0 4.62From friends or neighbors

0 3.14 1.56 3.58 0 0 0

Almost all tobacco products were subject to taxation across the regions. While just under three quarters of people in the Mountain region bought their tobacco from a shop, the remainder purchased it from a local market. In the Hills and Terai regions 9 in 10 people got their tobacco from a shop.

Table 30: Geographical region wise division of where people get their tobacco

Tobacco buying places Mountain Hill TeraiRetail shop 72.45 93.83 93.88Local market 27.55 4.54 5.63From friends or neighbors 0 1.63 0.5

Typically, tobacco products such as bidis and smokeless tobacco have been perceived as “hard to tax” due to their more informal nature. However, our survey found that almost three quarters (73.4%) of bidi smokers and 95.2% of respondents obtain their smokeless tobacco from a retail shop nearby. This suggests that increasing taxation on smokeless tobacco and bidis is also practical and deliverable.

Tobacco user’s response on tobacco price change

Over half of respondents (51.3%) said that they would either reduce tobacco use or stop consuming it entirely if the price of cigarettes were to double64.

Table 31: Tobacco users response: if tobacco price is doubled

Percentage

Stop consuming 8.4Reduce 42.9

Continue the same 42.6Switch to other substitutes 0.3

Don’t know 5.7

Our survey results support international evidence that shows that the poor are more price sensitive and so more likely to reduce or quit smoking, as opposed to increasing their expenditure on tobacco65. In our survey, we

64 NSEPT survey 2019/2020, Q57. If the price of the cigarettes (other tobacco products) were to double, how would your tobacco consumption change?65 World Bank (2003). A study of the economics of tobacco in Nepal. Available at: https://openknowl-edge.worldbank.org/bitstream/handle/10986/13750/288870Karki1A0Study1whole.pdf?sequence=1&isAl-lowed=y


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asked smokers what they would do if the price of cigarettes doubled. Respondents who said they would quit or reduce smoking were 13% higher in the lowest income group than in the highest income group.

Overall, the percentage of tobacco users stating that they would stop consuming or reduce tobacco use if the priced doubled was consistently high across all three geographical regions. More than half of people would reduce their use of tobacco in the Mountain region. In Terai more than half would either reduce their consumption or give up entirely. In the Hill region around 4 in 10 people would either quit or reduce the amount they use.

Table 32: Region wise response: if price of the tobacco product is doubled

Mountain Hill Terai

Stop consuming 2.3 8.4 9.3Reduce 52.4 36.1 47.5Continue the same 44.2 47.2 38.3Switch to other substitutes 0.0 0.5 0.2Don’t know 1.1 7.7 4.7Total 100 100 100

The percentage of people saying that they would continue using the same amount of tobacco if the price doubled was far higher in Province 1 and Gandaki compared to the other provinces.

Table 33: Province wise response: if price of the tobacco product is doubled

Province 1

Province 2

Bagmati Gandaki Province 5

Karnali Sudurpaschim

Stop Consuming 8.4 11.3 4.1 13.23 11.2 1.0 7.2Reduce 21.8 46.8 35.2 24.7 40.6 43.1 72.6Continue the same 63.2 38.9 51.9 57.8 38.1 46.0 19.0Switch to other substitutes 2.0 0.0 0.0 0.0 0.0 0.0 0.6Don’t know 4.6 3.0 8.8 4.2 10.1 9.9 0.6Total 100 100 100 100 100 100 100

Younger tobacco users are more likely to stop consuming or reduce their consumption of tobacco if the price were to double. Around 6 out of 10 people aged between 18 and 30 would either stop entirely or reduce their use. Most smokers start when they are young, so discouraging young smokers today will translate into lower prevalence rates in the future. Taxation is a key policy tool to break the intergenerational cycle of high prevalence rates. Higher tobacco prices make teenagers less likely to start smoking and more likely to give up. They are more sensitive to price increases, as they have less disposable income and they have been smoking for less time and so are less addicted. There is very little risk of young people forgoing necessities to buy tobacco, and they are less likely to switch to homegrown substitutes.

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Table 34: Age-wise response: if the price of the tobacco product is doubled

18-30 31-40 41-50 51-60 60+

Stop consuming 10.6 6.4 7.3 7.4 10.0Reduce 52.7 46.3 40.2 37.8 35.7Continue the same 32.9 44.0 44.0 49.8 43.7Switch to other substitutes 0.0 0.5 1.0 0.0 0.4Don’t know 3.7 2.8 7.6 5.0 10.2Total 100 100 100 100 100

Affordability of cigarettes

Poorer households spend a greater proportion of their income on tobacco: the lowest income quintile66 spends 7.5% of their income on tobacco while for those with the highest income it drops to 2.9%.

Figure 13: Percentage of income spent on tobacco is lower in the higher per capita expenditure quintile

Similarly, we can see a correlation between per capita expenditure quintile and the percentage of expenditure on cigarettes and bidi. For the lowest per capita expenditure quintile, the percentage of expenditure on cigarettes and bidi out of total household expenditure is 9.6% and it declines steadily to 3.7% for the highest income quintile.

Figure 14: Percentage of income spent on cigarettes and bidi (disaggregated by per capita expenditure) is lower in the higher per capita expenditure quintile

66 One income quintile represents 20% of the respondents. Quintile 1 is the poorest income quintile and Quintile 5 is the richest income quintile.

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In our focus group discussions (FGD) with high school students the current cost and accessibility of cigarettes did not appear to be an issue for a lot of students.

The fact that tobacco smokers in the poorest quintile consume more than those in quintiles 2 to 4, suggests that the cost of smoking is not causing them to limit their intake. Even for the very poorest quintile, expenditure on tobacco remains below 10% of overall expenditure.

Figure 15: There is no correlation between the income quintiles and the number of sticks smoked per week

Policy makers are often concerned about the short-term hit of increased tobacco prices on poor households, particularly given the higher prevalence rate among lower-income groups. But evidence also shows that the poor are more price sensitive and so more likely to reduce or quit smoking, as opposed to increasing their expenditure on tobacco67.

It is not tobacco tax that is regressive, it is tobacco use. Low-income households are disproportionately affected by tobacco use68 :

• Spending on tobacco has an opportunity cost as it diverts resources away from other goods. Low-income households have less disposable income and so are particularly vulnerable to this diversion.

• Tobacco use is associated with a range of health problems. The direct health costs to households are proportionately higher for low-income households.

• As is the loss of income because of tobacco-related illness.

Given the regressive nature of tobacco use, keeping taxes low is not a pro-poor policy. In actual fact, raising taxes to discourage the poor from smoking could have a disproportionately positive impact in the long-run.

67 World Bank (2003). A study of the economics of tobacco in Nepal. Available at: https://openknowledge.world-bank.org/bitstream/handle/10986/13750/288870Karki1A0Study1whole.pdf?sequence=1&isAllowed=y68 WHO (2012). Tobacco taxes as a tobacco control strategy. Available at: https://tobaccocontrol.bmj.com/content/tobaccocontrol/21/2/172.full.pdf

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Policy Recommendations

In this section we will make concrete recommendations on what the government should do to improve the current tobacco tax structure. Our recommendations are based on two principals:

1. Substantially increase tax rates. While tobacco taxes have been increasing in line with inflation over the last few years, the most fundamental problem of tobacco taxes in Nepal is that taxes are very low to begin with. The taxation of tobacco products in Nepal is significantly below the WHO standard of 70% of retail price. As of 2019, Nepal imposes tobacco tax of just 15.5% of retail price (excluding VAT), which is the lowest among South Asian countries69. Our analysis shows that since 2016 tobacco has become more affordable. Therefore, there is an opportunity to increase taxes on cigarettes which will both decrease consumption and increase government revenues. This could be a crucial source of revenue during these fiscally pressing times.

2. Move to a uniform tax system. Specific taxes should be applied uniformly so that all cigarettes are taxed equally. A tax policy with multiple tiers creates opportunities for cigarette companies to reposition themselves to lower the tax band. Additionally, the wide range of taxes translates into a wide range of cigarette prices in the market which reduces the impact of tax on consumption by allowing for substitution. A single specific tax would be more effective in raising prices and would be simpler to administer.

We propose that this is rolled out over a maximum 6-year period. Whilst we recommend a movement to a uniform system in which all tiers are eventually set equal to the highest rate, phasing the introduction by gradually narrowing the tax bands helps to provide some predictability for consumers, and limits the impact of price increases for poorer consumers in any one year.

First Phase (2020 Budget Measures)

As a first step towards improving the tobacco tax structure, we propose a relatively straightforward uplift in the rate of tax applied to the existing tax tiers. This first step could be taken in this year’s budget. We have seen an increase in the specific tax applied to cigarettes in recent years – reaching 20% in 2018. However, given the low starting point, there is scope for larger increases in order to make gains in affordability, discourage people from smoking and raise much-needed additional revenue.

As a first step towards improving the tobacco tax structure, we propose a relatively straightforward uplift in the rate of tax applied to the existing tax tiers. This first step could be taken in this year’s budget. The current Covid-19 crisis increases the need for substantial increase to taxes to discourage people from smoking and raise much-needed additional revenue during a challenging economic period.

Ahead of the 2020 budget there are two interrelated decisions for policy makers on cigarette taxation. First, there is a question about the rate of increase in excise duties. Second, there is a question about how much to start to reform excise duties to narrow the difference in the specific taxes among different tiers, consistent with international best practice. NDRI’s preferred option seeks to balance three objectives for policy change: (i) raising revenue, (ii) correcting the recent increases in affordability of tobacco, and (iii) starting the longer-term reform process. The recommendations for year 1 put more weight on the first two objectives, but takes an initial step towards reform by introducing differential tax increases.


SECTION 6

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Our recommendation for tax increases in 2020 are presented in Table 35. Our estimations suggest that these increases could result in up to 57% or Rs. 4.1bn additional revenue in the 2020/21 fiscal year. On average, this translates into a 10% increase on the price of a packet of cigarettes, and an estimated reduction in consumption of 5-10% in year 1.

Table 35: NDRI preferred option [Option 1]– a tax increase with a reduction in the difference between tax bands

Cigarettes 2019 (Percentage Change) New Tax

(1) Without Filter 495 75 866(2) Up to 70 mm length 1135 70 1930(3) More than 70 mm up to 75mm length (with filter)

1475 65 2434

(4) More than 75mm up to 85mm length (with filter)

1920 60 3072

(5) More than 85mm length (with filter) 2715 55 4208

NDRI strongly recommends that the first phase combines both an increase in taxation and a first step towards collapsing the tiers. However, below we present high, medium and low magnitudes of increase across all bands in order to demonstrate how much revenue additional revenue could be raised. These are intended to be illustrative examples to give policy makers some indication of the potential revenue gains from different levels of tax increase. We recommend that these should be combined with reform to the tiers.

Table 36: Option 2 (low): Forty five percent increase in specific tax across the different bands


Without Filter 495 45 718In up to 70 mm length 1135 45 1646More than 70 mm up to 75mm length (with filter) 1475 45 2139More than 75mm up to 85mm length (with filter) 1920 45 2784More than 85mm length (with filter) 2715 45 3937

Table 37: Option 3 (medium): Seventy Five percent increase in specific tax across the different bands



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Table 38: Option 4 (high): Hundred percent increase in specific tax across the different bands



Revenue Increase

In the following chart, we show estimates of how the different policy options affect the revenue attained from taxes of cigarettes. In case of option 1, our preferred option which presents a combination of narrowing the difference in the tiers and applying a tax increase, the increase in revenue from cigarettes would increase between 56.69% (when PED = -0.5) and 48.38% (when PED = -1). Similarly, we have shown the increase in revenue from option 2, option 3 and option 4 – our low, medium and high scenarios respectively. If one opts for option 2, the range of increase is 39.94% (when PED = -0.5) and 34.89% (when PED = -1). For option 3, the range of increase is 64.83% (when PED = -0.5) and 54.66% (when PED = -1). Lastly, for option 4 the range of increase is 84.50% (when PED = -0.5) and 69% (when PED = -1).

Figure 16: Revenue Estimation70

Source: Author’s calculation using NDRI survey

In the following table we have shown the revenue change (both absolute and percentage), percentage change in retail price and percentage change in consumption for the four options. When we consider option 1 (the NDRI preferred option), we see that a tax increase based on those prescriptions can increase retail price by 10.08%, which would decrease consumption by 5.04%. When the PED is -0.5, this increase in retail price would lead to an increase in cigarette revenue by 56.69% (Rs. 4,073 million). Furthermore, when the PED is -1, the same increase in retail price would lead to an increase in revenue of cigarettes of 48.38% (Rs 3,476 million). We can see the corresponding revenue changes as a result of the change in tax policy in the following table.

70 The methodology of estimating revenues is in the appendix

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Table 39: Estimations of percentage change in revenue, change in revenue (cash terms), percentage change in retail price, percentage change in consumption

Option 1 Option 2 Option 3 Option 4PED =

-0.5PED =

-1PED =

-0.5PED =

-1PED =

-0.5PED =

-1PED =

-0.5PED =

-1Percentage change in revenue

56.69 48.38 39.94 34.89 64.83 54.66 84.5 69

Cash change in revenue (Million Rs.)

4,073 3,476 2,870 2,507 4,659 3,928 6,072 4,959

Percentage change in retail price

10.08 10.08 6.98 6.98 11.63 11.63 15.5 15.5

Percentage change in consumption

-5.04 -10.08 -3.49 -6.98 -5.81 -11.63 -7.75 -15.5

Source: Author’s Calculation using NDRI Survey Data

Concerns regarding illicit inflow

A common concern with increasing tobacco taxes is that higher taxes create greater incentives for tax avoidance and evasion and will therefore increase illicit trade. While this risk should be considered, the extent of the problem is significantly overstated – usually by the tobacco industry to discourage tax increases. Given that Nepal and India share a border, there are concerns whether a high tax increase in Nepal could lead to illicit cross-border trade. In Nepal, the porous border with India is a key source of concern. While the concerns are valid, evidence shows that not only are tax on tobacco products quite significantly higher in India compared to Nepal but so are the prices of tobacco products. Based on WHO estimates, in the year 2018 the price of cigarettes for the most sold brand is 10.51 (at dollar purchasing power parity), which is much higher than Nepal where price of the most sold brand is 6.19 (at dollar purchasing power parity). Furthermore, tax as a percentage of cigarettes is 53%71 and 60% for smokeless tobacco which is almost twice that of Nepal. Therefore, given the higher prices in India it is very unlikely that increase in taxes based on our recommendations would lead to increase in illicit flow of cigarettes and other tobacco products.

Second Phase: Reform Over the Following 3-5 Years

In this second phase, cigarette tax would continue to increase annually over 5 consecutive years, eventually eliminating the difference between the tiers to create a uniform tax system. The lowest tier “without filter” has a significantly lower tax rate than the other tiers and will require sustained high increases over 5 years to collapse it upwards into a uniform system. Other tiers, such as (2) and (3) (table 35) which are already relatively close could be collapsed quickly, i.e. within 1-2 years. The exact rates of increase would vary each year and should be decided based on ongoing evaluation of key variables such as affordability, tax out of retail price, revenue, consumption and prevalence rates.

During this phase, once the tiers have been collapsed into one specific tax rate, we propose an amendment to the excise duty law of Nepal which legally changes the tax system to a uniform specific tax on cigarettes.

71 Source: https://www.thehindu.com/news/national/gst-has-made-tobacco-products-only-marginally-costlier/article29261312.ece

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Third Phase

The final phase would consist of developing a policy tool to guide further tax increases to ensure that gains in reducing affordability are maintained. We propose an annual tax uplift that is made up of two components: firstly, a mandatory component that sees an increase in specific tax which is a function of inflation and income growth. Secondly, a discretionary uplift in tax which continues to increase the real tax rate and gradually move Nepal towards the WHO guideline of 70% excise tax out of retail price.

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Appendix

Methodology and calculations

According to WHO, for low income countries the PED of cigarettes is generally within the ratio of -0.5 and -172.

PED=(% change in quantity of cigarettes consumed/% change in price of cigarettes)Furthermore, we need to calculate two numbers. An estimate of the current number of tax paying cigarettes and the average unit price of cigarettes. Based on the survey, the average unit price of cigarettes is Rs. 5.39.73 In our survey, the proportion of spending on cigarettes out of total tobacco expenditure is 51.18%74. We assume that this is the share of taxes from cigarettes out of total tobacco taxes. This would be around Rs. 7,186,286,160. Given that cigarettes are taxed more than other tobacco products, the share of revenue from cigarettes is likely to be higher than this. This is a conservative estimate.

We have already mentioned earlier in the paper that the percentage of taxes out of retail price in Nepal is around 27 percent. This 27% consists of 11.5% VAT and 15.5% excise duty. We know that the estimated unit price in our survey is 5.39. So, 15.5% of the unit price would be around Rs. 0.84. This is the average tax paid per cigarette. We can now estimate the number of tax paying cigarettes be dividing revenues from cigarettes by average tax paid per cigarette, i.e. 7,186,286,160/0.84. This would be around 8,601,695,086 cigarettes.

Option 1 (NDRI preferred option)

Based on our recommendation, we have suggested an increment of tax based on table 35, the overall increase in tax would be 0.54. The increased tax amount i.e. 0.84 plus 0.54 is 1.38. The new unit price after the imposition of this increase in tax is 5.93. The resultant excise tax out of price would be 23.23% and the increase in price of cigarettes would be 10.08%.

When the PED is -0.5, the increase in price of 10.08% would lead to a decrease in quantity consumed by 5.04%. The new total demand would be 8,168 million cigarettes. The resultant increase in revenues from cigarettes would be 56.69%. This is a revenue increase of Rs. 4,073 million rupees compared to the previous year.

When PED is -1, the increase in price of 10.08% would lead to a decrease in quantity consumed by 10.08%. The new total demand of cigarettes would be 7,735 million cigarettes. The resultant increase in revenues from cigarettes would be 48.38%. This is Rs. 3,476 million rupees more compared to the previous year.

Unit Price 5.39Tax as a percentage of Unit Price 15.50%Tax Amount (old) 0.84Pre-Tax Price 4.55New Tax increment 65.00%After new policyIncrement in Tax (based on the policy recommendation) 0.54Tax amount (new) 1.38

72 This range could vary. For instance, WHO (2018) estimates this range to be -0.2 to -0.7, but we would assume the range to be -0.5 to -1 since in Karki et. Al. (2003), the PED was -0.882.73 Calculated by Total Expenditure on Cigarettes divided by Total number of cigarettes consumed (based on the survey)74 Note this is an underestimate of the tax revenue from cigarettes since the tax of cigarettes is considerably higher than other forms of tobacco (smokeless tobacco, bidi etc.)

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Pre-Tax Price 4.55Price after new policy 5.93Tax as a percentage of price 23.23%Percentage Increase in Price 10.08%

Old tax revenue 7,186,286,160.00Unit Price 5.39Tax Amount (old) 0.84Total Number of tax paying cigarettes (Tax Revenue/Tax Per Cigarette) 8,601,695,086

New Ploicy:

PED -0.5% Change in Price 10.08%% Change in Demand -5.04%Change in Demand (433,310,389.98)New Total Demand 8,168,384,696.50New Tax Per Cigarette after policy change 1.38

New Revenue from Cigarettes 11,260,057,041.24% Increase in Revenue out of estimated cigarette revenue 56.69%% increase out of total tobacco revenue (assuming the non cigarette tobacco tax revenue is constant) 29.01%

PED -1% Change in Price 10.08%% Change in Demand -10.08%Change in Demand (866,620,779.96)New Total Demand 7,735,074,306.52New Tax Per Cigarette after policy change 1.38

New Revenue from Cigarettes 10,662,741,918% Increase in Revenue out of estimated cigarette revenue 48.38%% increase out of total tobacco revenue (assuming the non-cigarette tobacco tax revenue is constant) 24.76%

Option 2



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Unit Price 5.39Tax as a percentage of Unit Price 15.50%Tax Amount (old) 0.84Pre-Tax Price 4.55New Tax increment 45.00%After new policyIncrement in Tax (based on the policy recommendation) 0.38Tax amount (new) 1.21Pre-Tax Price 4.55Price after new policy 5.77Tax as a percentage of price 21.01%Percentage Increase in Price 6.98%


New Ploicy:




New Revenue from Cigarettes 9,693,311,915

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% Increase in Revenue out of estimated cigarette revenue 34.89%% increase out of total tobacco revenue (assuming the non cigarette tobacco tax revenue is constant) 17.85%

Option 3:






New Policy:


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New Revenue from Cigarettes 11,114,040,689% Increase in Revenue out of estimated cigarette revenue 54.66%% increase out of total tobacco revenue (assuming the non cigarette tobacco tax revenue is constant) 27.97%

Option 4:

Based on our recommendation, we have suggested an increment of tax based on table 38, the overall increase in tax would be 0.84. The increased tax amount i.e. 0.84 plus 0.84 is 1.67. The new unit price after the imposition of this increase in tax is 6.23. The resultant excise tax out of price would be 26,84% and the increase in price of cigarettes would be 15.50%.


When PED is -1, the increase in price of 15.5% would lead to a decrease in quantity consumed by 15.5%. The new total demand of cigarettes would be 7,268 million cigarettes. The resultant increase in revenues from cigarettes would be 69%. This is Rs. 4,959 million rupees more compared to the previous year.


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New Policy:



PED -1% Change in Price 15.50%% Change in Demand -15.50%Change in Demand (1,333,262,738.40)New Total Demand 7,268,432,348.08New Tax Per Cigarette after policy change 1.67

New Revenue from Cigarettes 12,144,823,610% Increase in Revenue out of estimated cigarette revenue 69.00%% increase out of total tobacco revenue (assuming the non cigarette tobacco tax revenue is constant) 35.31%

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References:

World Health Organization (2019), “WHO Report on the Global Tobacco Epidemic”

World Health Organization (2010), “WHO Technical Manual on Tobacco Tax Administration”

World Bank Group (2018), “Economics of Tobacco Taxation Toolkit”

World Bank Group (2019), “Myanmar: Overview of Tobacco Use, Tobacco Control, Legislation and Taxation”

World Health Organization (2015), “WHO report on the global tobacco epidemic”

Nargis, N, Stoklosa M, Drope J, Ikamari L, Ong’ang’o J R, Fong G T, Kimosop V and Chaloupka FJ (2015), “Cigarette Taxation in Kenya at the Crossroads: Evidence and Policy Implications”

Nargis N, Hussain AKM G, Goodchild M, Quah A CK and Fong GT (2019), ‘A Decade of Cigarette Taxation in Bangladesh, Lessons Learnt for Tobacco Control’

Nargis N, Stoklosa M, Drope, J, Fong G T, Quah C K Q, Driezen P, Shang C, Chaloupka F J and Hussain A K M (2018), “Trend in the affordability of tobacco products in Bangladesh: findings from the ITC Bangladesh Surveys”

World Bank Group (2019), “Brazil: Overview of Tobacco Use, Tobacco Control, Legislation and Taxes”

Ribeiro L and Pinto V (2019), “Accelerating Effective Tobacco Taxes in Brazil: Trends and Perspectives”

Institute of Economic Sciences (2018), “Accelerating Progress on Effective Tobacco Tax Policies in Low- and Middle-Income Countries”

Tobacconomics (2018), “Increasing the tobacco tax rate in Vietnam is not enough: Tobacco tax structures need reforms too”

Keen, M (1998), “The balance between specific and ad-valorem taxation”, Fiscal studies, Volume 19

Karki YB, Pant KD and Pande BR (2003), “A Study on the Economics of Tobacco in Nepal”, World Health Organization

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Nepal Development Research InstituteShreedurbar Tole, Pulchowk, LalitpurP.O. Box 8975, EPC 2201, Kathmandu

NepalE-mail: [email protected]

Telephone: +977-1-5537362, 5554975Website: www.ndri.org.np

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Taxing Tobacco in Nepal: What can be done

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