A new simulation-based study by Policy Exchange Bangladesh (PEB), has reinforced that simply increasing tobacco taxes is no longer the most effective way to improve fiscal or public health outcomes in Bangladesh. By comparing the country’s existing four tier ad valorem structure with a fully specific excise system and a mixed model, the research shows that reform is both timely and necessary.
The findings were presented at a research dissemination event, where PEB Chairman Dr M Masrur Reaz said adopting a specific tax system could not only boost revenue but also reduce tobacco consumption over the same period.
“The government should move away from the current ad valorem taxation policy and adopt a specific tax system,” he said.
The study finds that shifting to a fully specific excise system could generate approximately Tk 22,000 crore in additional cumulative government revenue over the next decade, while also reducing cigarette consumption by a further 8.6 percent – demonstrating that revenue growth and stronger health impacts can be achieved simultaneously.
Bangladesh currently applies a fully ad valorem, four tier cigarette tax system and includes VAT and Health Development Surcharge, resulting in a total tax incidence of 83% – one of the highest globally. While this framework has delivered revenue growth in previous years, recent data shows diminishing returns from repeated price and supplementary duty increases. The January 2025 adjustments produced only a 5% rise in revenue, compared to a 17% increase recorded in FY 2025 under similar measures. This trend signals that the ad valorem system is reaching its revenue ceiling. The structure now encourages consumers to downgrade to lower priced brands, limiting revenue potential and weakening the overall impact of tax policy. Tobacco taxes currently account for nearly 9% of total government tax revenue.
High ad valorem rates also create strong incentives for pricing behavior that widens price gaps between tiers. These distortions – exacerbated by the growth of illicit and informal market activity – undermine both revenue collection and regulatory effectiveness.
Many countries have transitioned away from purely ad valorem structures. Specific excise taxes, which apply a fixed amount per stick or pack, offer clearer advantages: stable and predictable revenue, reduced opportunities for manipulation, narrower price differentials, and simpler administration. Countries across Europe demonstrate that mixed systems anchored by strong specific components can protect revenue while advancing public health goals.
This finding directly challenges the false trade-off often implied in tobacco tax debates, that governments must choose between revenue and health. In reality, the evidence shows that a well-designed specific excise system can deliver both. By reducing affordability more evenly across price segments and limiting down-trading, specific taxes achieve deeper and more sustained reductions in consumption while preserving the tax base.
A carefully sequenced transition toward a specific excise system offers a rare opportunity in stronger and more predictable revenue, simpler administration, reduced illicit incentives, and meaningful progress toward public health objectives.
