Last week Ethiopia passed a landmark bill increasing taxes on tobacco products. The tax reform came almost exactly a year after the country passed its comprehensive tobacco control law introducing broad smoke-free policies, advertising bans, large pictorial warnings on packs, new age restrictions on cigarette purchasing as well as banning electronic cigarettes and flavored tobacco. The last-week’s bill shifted the ad-valorem excise tax from 75% to 30% of the domestic production costs or CIF for imported cigarettes, while introducing specific excise tax rate of eight Ethiopian Birr (ETB) (c.a. 0.25 USD) on each cigarette pack. It is estimated that the new tax will not only bring additional 925 million ETB (28.7 million USD) to the state coffer, but also, through its impact on cigarette prices, will reduce the rate of cigarette smoking among adults by 10%, saving around 91 thousand lives.
The new tax is a huge victory for public health in Ethiopia and hope for many low- and medium-HDI countries that still struggle with increasingly more affordable tobacco products. The introduction of the bill was widely supported by the World Health Organization, the World Bank and many non-governmental organizations working in Ethiopia and internationally. The new bill is well-grounded in the latest research in economics of tobacco markets. Historically, with the ad-valorem-based tax system, the economy-brand cigarettes costed only 20% of premium-brand cigarettes, allowing smokers to avoid the tax by shifting to the less expensive brands. The tax will not only increase prices of all cigarettes, but also reduce large price gaps between economy and premium cigarettes, boosting the positive health impacts of the tax.
There is room for further improvement in both the tax rates and structure. The legislation is predicted to increase the tax share of the average retail price of cigarettes to around 54%, which is still far from the WHO-recommended minimum of 75%. Higher rates would not only help Ethiopia to meet the WHO standards, but will also help in further reductions in tobacco use. Additionally, the current rate that is based on CIF/manufacturing cost makes it easy for tobacco companies to evade the tax through, for example, under-invoicing, or straight-out avoid it by shifting its costs higher up in the supply chain. Switching the tax base from CIF/manufacturing cost to the retail price and eventually replacing the mixed tax system by one that is entirely based on the specific tax would further advance the public health and economic goals of the tobacco tax policies in Ethiopia.