Case for higher cigarette taxes

The health and economic consequences of non-communicable diseases (NCDs) are well documented. The question of how to best control and prevent NCDs is urgent as its burden is dramatically rising in Nepal. Tobacco, the only risk factor for the four main NCDs—cardiovascular diseases, cancers, chronic respiratory disease, and diabetes—is a growing problem and many more deaths are predicted if no action is taken to control its use. Nepal Burden of Disease 2019 report shows that smoking is the most important risk factor and responsible for around 18 percent of total deaths. 

In the WHO’s Framework Convention on Tobacco Control, taxation on tobacco products has been considered the ‘best buy’ and most effective measure to address NCDs. Reducing affordability of tobacco products cuts consumption, thereby improving public health and increasing government revenues.

If cigarettes are made more expensive, people start quitting, smoke less or don’t start at all. But, unsurprisingly, the tobacco industry of Nepal has been opposing excise tax increases to protect their profits. The most common argument they have is that an increase in tax will result in a spike in illicit trade. In turn, illicit cigarette trade is the key reservation policy makers have when arguing against tax increase. 

Particularly for Nepal, the porous border with India, and price difference in cigarettes (cheaper in India) is leading to a free flow of cigarettes to Nepal. Thus, Nepal’s approach to taxing tobacco has been sporadic and, as a result of several years of increases in tax rates below inflation and income growth rates, or no increases at all, tobacco has become more affordable.

The past two decades witnessed minimal increase in excise duties in cigarettes, making last year’s 25 percent increase the highest in decades. However, tax rates on tobacco in Nepal are still relatively low (38 percent on most sold brands) compared to neighboring countries and international recommendation of 75 percent of retail price. 

The industry’s claim of 25 percent illicit cigarettes in the market has been proven wrong by a 2021 study of the Nepal Development Research Institute (NDRI). The only national study of its kind titled “Extent of Illicit Cigarette Trade in Nepal: A Pack Examination Method” found only 0.33 percent of 4,300 cigarette packets examined were illegal—or less than one in every 200 packets. This finding is consistent with the finding from the India’s pack examination with very low illicit cigarette trade of 2.73 percent compared to 20 percent claimed by its cigarette industry.

In the aforementioned study, we used retailers pack survey within pack examination method, which has been approved by WHO and World Bank for countries like Nepal where majority of smokers use cigarettes in loose packets and where there is lack of cigarette production and market consumption data. The study was carried out in all seven provinces of Nepal among 1,204 cigarette retailers from 23 Primary Sampling Units (PSUs).

Overall, only 14 packets (0.33 percent) were found to be illegal in the primary method of retailers’ packet collection. This was also validated by the result of supplementary methods of littered pack collection with 0.6 percent illegality. 

The finding shows the majority of illegal packets were imported from Indonesia. The Indonesian brand Djaram Black was the most common illegal brand (two-thirds). But low numbers of counterfeit packets of Khukuri and Shikhar Filter Kings were also found. 

Most illegal packets found in non-border regions (Kathmandu and Pokhara) are not cheap, indicating price is not the only factor. Taste/flavor and preference also promote illicit trade.

The very first and only nationwide study’s illicit cigarette trade findings are shocking and contrast the cigarette industry’s claim. This gives us a strong reason to raise cigarette taxes. Moreover, as this study took place six months after the government increased 25 percent excise duty in its 2021 budget, the effect of price raise on illicit trade was found to be weaker than what policy makers may think.

This is consistent with the findings from studies in other low- and middle-income countries like Georgia, Vietnam, Gambia, Mongolia, Colombia, South Africa —there is no relationship between tax changes and smuggling. Further, when developed countries like New Zealand, UK, Scotland, Canada, Ireland, Australia, Sweden and Finland are trying to eliminate tobacco or reduce the smoking population to under five percent by 2025-2030, we should learn from them and initiate effective interventions against tobacco to save our current and next generations.

Therefore, we strongly recommend the government to consistently raise cigarette taxes, which is good both for public health and government revenue. The forthcoming budget provides a wonderful opportunity to do so.

The author is a lead researcher of ‘Illicit Cigarette Trade in Nepal’ and a health economist by experience who also manages the tobacco control program in NDRI