Govt. must safeguard excise revenue and consumers

Alcohol and tobacco continue to be vital contributors to sustain Sri Lanka’s economy, despite efforts to downplay its significance

By Kumar Ranaweera 

Exigencies in domestic and global markets produced runaway inflation in Sri Lanka, and unprecedented price hikes have heaped significant burdens on a weary public. The World Food Program reports over six million Sri Lankans are now ‘food insecure’, with the situation likely to further deteriorate. As the Government grapples with severe measures to defuse this crisis of its own making, the President promises sweeping changes to restore stability. 

The way out of this crisis plots a painful path, and the public must bear the brunt of countless political blunders. In its bid to achieve a better balance of payments, the Government raised taxes and envisaged challenging State-sector reforms that are vital to ensure the country’s sustainability. Reform has been a rejected topic for decades despite its pressing need, but it could nonetheless be achieved through conducive regulations and through building strategic reserves where necessary, such as at the Ceylon Petroleum Corporation (CPC). 

However, short-term wins are often accompanied by long-term consequences. The Government must exercise caution with some of its proposed tax measures, to avoid dismantling its own cause. The Excise tax serves a contentious but very relevant illustration to this problem. In Sri Lanka, alcohol and cigarette prices are the highest in the world. Following the Excise tax increase in November last year, both sectors were also slapped with VAT and Social Security Levy hikes. In the case of cigarettes, what was already the most expensive product in the world as per World Bank data went above and beyond consumer affordability, while alcohol followed closely behind. 

With the fiscal policy plan for 2023 due later in November this year, both these sectors are likely in line for another Excise price hike as the State desperately searches for additional revenue. What must be noted however, is that cigarettes and alcohol bring in much needed, steady tax revenue to the country; and due to excessive pricing stemming from high taxation, sales in these sectors will decline and thus, the Government will lose the long-term financial reinforcement the country direly needs. 

Sri Lankans are amongst the highest per capita consumers of alcohol in the world, and 80% of the market consists of illicits, as per the WHO. Smoking incidence in Sri Lanka is 15% of the male population as per Health Ministry data. The data however excludes women smokers and ignores the prevalence of illicit cigarettes and the beedi market, which form a much larger base than cigarettes. 

A further price hike will inevitably push consumers towards illicit products, which are considerably easier on the pocket than legitimate products. A bottle of moonshine (kasippu) can be bought for a price as low as Rs. 300 and a stick of beedi for just Rs. 6, while smuggled cigarettes are found in the market for Rs. 50 a stick. On the other hand, a bottle of legitimate locally manufactured arrack costs well over Rs. 1,200, while a cigarette would be sold at approximately Rs. 80 upwards. 

Consumers are already opting for illegal, cheaper products, and this is amply demonstrated in financial reports published by the product’s legal manufacturers. The impact to Government revenue resultantly will be significant, and State earnings from tobacco have already dipped due to excessive price hikes over the past few years. What is concerning here is that the Government can ill afford to disrupt its revenue at this critical juncture where stable means of income is the definitive need of the hour. 

Customs data indicates that over 600 million cigarettes are smuggled into the country annually, whilst the beedi market constitutes of over 5 billion sticks annually as per research published by the Social Development Network (SDN). There has been no tax revenue to the Government from these segments and the estimated loss as a result exceeds Rs. 40 billion. With 80% of the alcohol market dominated by moonshine, artificial toddy and smuggled products, the annual loss to the Government is estimated at over Rs. 30 billion. With the State already losing Rs. 70 billion annually due to excessive taxes and the lack of regulation and policing, officials must critically assess if it could afford to send a further portion of Sri Lankan consumers underground, posing further revenue, health and social security challenges to the nation. 

Another consideration is the impact to the hospitality sector. With tourism poised to channel much needed foreign exchange into the country, the Government must give serious thought on the impact of price to a destination already blighted with political unrest, power cuts, fuel shortages, inflated food costs, and scarcity of raw materials. If Sri Lanka anticipates to attract high-net worth European travellers, alcohol and tobacco products are vital to the mix. Further, with large numbers of tourists coming from India and China, it is imperative that Sri Lanka’s tourism authorities profile their target groups and requirements. Another telling statistic here is that one in three cigarettes smoked in the world is smoked in China.

Excise taxes are a contentious issue due to the health concerns surrounding the two products. Anti-alcohol and tobacco lobby groups insist pricing will deter consumers from consumption. However, they appear to ignore the reality of consumers downtrading to illicits, which proffers far more serious harm to human health and national security. Illicit alcohol and tobacco consumption have risen annually as detailed in data published by the Department of Excise, Department of Customs and the Sri Lanka Police. Lobby groups also claim price hikes will result in the reduction of public expenditure on health to treat victims of alcohol and tobacco abuse. However, there is no data available to uphold this claim.

It is imperative the Government takes a pragmatic approach to exercise as it does with other aspects of tax and institutional reform. Alcohol and tobacco continue to be vital contributors to sustain Sri Lanka’s economy, despite efforts to downplay its significance. An understanding of the ground realities of this equation can lead to effective taxation and regulation, yielding greater revenue and governance that will be more constructive in managing impacts to public health and safety. 

(The writer is a graduate from the University of Colombo, and is a lead researcher attached to a leading audit and consulting services firm in Sri Lanka.)