The tax on cigarettes in Nepal is the lowest in South Asia. At a time when the government is putting a 13 percent value-added tax (VAT) on daily essentials like potatoes and onions, it did not increase the tax on cigarettes significantly in the budget for the fiscal year 2023/24. Compared to most countries in the world, taxes on tobacco and cigarettes are very low in Nepal. The government only increased the tax on cigarettes by three percent. In this context, Pratik Ghimire of ApEx talked to Anjana Lamichhane, research associate at Nepal Development Research Institute (NDRI).
Despite the continuous lobbying, the government didn’t impose high tax on tobacco products. Why do you think so?
The current tax rates imposed on tobacco products in Nepal remains considerably low compared to neighboring countries and international recommendations. In the previous two years, the government had raised around 50 percent (25 percent in 2021/22 and 20 percent in 2022/23) excise duty and 20 percent increase in health hazard tax. But this year, the government has increased excise duty on tobacco products by a paltry 3 percent, bringing the total tobacco tax to 41 percent. However, it is lowest in South Asia as India and Sri Lanka impose significantly higher taxes, accounting for 53 percent and 77 percent of the retail prices, respectively.
The World Health Organization (WHO) recommends a minimum taxation of 75 percent to effectively discourage tobacco consumption. There has been no increase in the Health Hazard Tax this year. When accounting for the estimated inflation for the upcoming fiscal year, the overall percent of tax will decline to 39 percent from the 41 percent, further hampering the recommendations and needs. Despite our heightened lobbying efforts this year—surpassing the efforts made in the past five years—the government has failed to significantly increase the tax. It is difficult to ascertain the exact reason behind this unexpected turn, as the government had assured us to impose higher taxes on tobacco. The government’s decision has caught us off guard and left us puzzled.
Do you see a nexus between the government and tobacco-related businesses in this matter?
I can’t say because I have no proof. Despite our efforts, the government is reluctant to impose a higher tax rate on tobacco-related products, which means the government may have come under pressure from some quarters. These things should be researched and truth must be uncovered as the high prevalence of tobacco use, coupled with the associated health risks and economic costs, demands urgent action.
Is an increase in tax the only way out to reduce tobacco consumption?
The WHO came up with the ‘MPOWER’ formula in 2008. It is a comprehensive plan comprising six essential and effective strategies for tobacco control. These strategies are: M (Monitoring tobacco use and prevention policies), P (Protecting individuals from tobacco smoke), O (Offering assistance to quit smoking), W (Warning about the hazards of tobacco), E (Enforcing bans on tobacco advertising, promotion, and sponsorship) and R (Raising taxes on tobacco). Among these, taxation plays a key role in effective tobacco control. It will take a couple of years for visible results to emerge. Tobacco is consumed by people of any background in Nepal and if the tax is increased, not everyone can afford it easily. Increasing tobacco tax rates can have other positive effects as well. For example, it can generate substantial revenues for the government, which can be utilized to fund various development projects, improve public services, and health care, among others.
How will this impact us?
Tobacco use poses a significant public health problem with far-reaching consequences. The affordability of tobacco products has contributed to a persistently high prevalence rate (of around 32 percent) among the population. This has led to increased mortality and morbidity from non-communicable diseases in Nepal, with an estimated 37,529 tobacco-attributable death in 2019 alone. Notably, tobacco use accounts for two out of every 10 deaths (19.4 percent) and stands as the second leading cause of death in Nepal. Also, tobacco use entails substantial economic costs, estimated at around Rs 40bn in 2022.
What are your recommendations for the budget of fiscal year 2023/24?
The Ministry of Finance must increase the excise duty on tobacco by at least 40 percent by amending the budget for the fiscal year 2023/24. A 40 percent hike in excise duty can generate an additional Rs 8.7bn to Rs 10.7bn in revenue, equivalent to approximately 2.3 percent of the forecasted budget deficit for 2023/24. Such an increase can lead to a consumption reduction of 2-6 percent. Alternatively, a more ambitious target of a 65 percent increase in excise duty will generate revenue of Rs 13.1bn to Rs 16.8bn. It is equivalent to over 3.7 percent of the forecasted budget deficit for the fiscal 2023/24. This move can reduce tobacco consumption by about four to 12 percent. These measures will significantly reduce damage resulting from tobacco use—both to public health and the national economy.
