BACKGROUND: In 2015, Zambia implemented an investment incentive to foster domestic cigarette production. Since 2016, cigarettes have been taxed at different rates, depending on whether they are locally manufactured or imported, i.e. tiered taxes. A 75% excise tax exemption is applied to locally-produced cigarettes. The investment incentive violates Article 5.3 of the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) that Zambia ratified in 2008.
Objective: To estimate the loss in real cigarette excise tax revenue attributed to the tiered excise taxes from 2016 to 2022 (excluding 2017 and 2018).
METHODS: We used tax revenue data from the Zambia Revenue Authority (ZRA), and population, GDP, and inflation data from the International Monetary Fund (IMF). We obtained demand elasticities from the international literature. We used the Tobacco Excise Tax Simulation Model (TETSiM) to retrospectively estimate how much excise tax revenue was lost as a result of the incentive. We exclude 2017 and 2018 due to inconsistencies in the ZRA data.
RESULTS: Our results show that in 2016, 2019—2022 Zambia lost a total of ZMW1.5 billion (in 2022 prices) (USD52.9 million) in excise tax revenue due to the tiered tax. On average (in 2022 prices), Zambia lost ZMW244 million annually, more than the average annual excise tax revenue (ZMW220 million) they collected. Cigarette prevalence increased from 9.0% to 11.5% during this period. Under a uniform specific tax, prevalence would have dropped to 7.6%.
CONCLUSIONS: Zambia’s investment incentive has caused more harm than good. Zambia should follow best practices and revise its tobacco tax structure, opting for a uniform specific tax, which taxes the same amount per cigarette regardless of whether cigarettes are imported or locally produced. Furthermore, Zambia should revise the tobacco excise taxes frequently, in line with inflation and income growth, to ensure that cigarettes remain less affordable over time.