• RIU calls for pragmatic and comprehensive tobacco policy to maximise revenue, achieve national health objectives, and curb growth of illicit markets

 The Research Intelligence Unit (RIU) London has warned that Sri Lanka is on the course to join the ranks of countries where smugglers are dominating the tobacco market.

It said that according to the latest data, total tobacco prevalence in Sri Lanka currently sits at 22.5% (WHO, 2020). The prevalence levels for tobacco products for men was recorded at 44.4% whilst for women it was 2.8% in Sri Lanka in 2018 (WHO, 2020).

However, RIU said: “Legal cigarettes in Sri Lanka only make up 31% of the tobacco industry, and the only category within the Excise Department purview.”

Between 2014 and 2016, government revenue from the tobacco industry grew at a CAGR of 18%. However, following the post-excise hike in 2016, the growth rate of government revenue declined significantly, and for the first time in recent history, in 2019, government revenue from the tobacco industry declined – a clear indication that the revenue model had broken and consumer affordability had reached a tipping point. The major tobacco producer, Ceylon Tobacco Company, contributed nearly Rs. 110 billion in excise and sales taxes annually, which constituted 97% of the total industry contribution.

RIU said recent years have been characterised by leakages in tax revenue due to the emergence of a thriving illicit market. Various studies have concluded the presence of smuggled cigarettes to account for as much as 15.57% or 23% of market share.

According to RIU’s own primary research, the share of illicit cigarettes grew from 10% in 2015 to 21% by 2019. This trend was triggered by an unprecedented rise in taxes in 2016, which resulted in a 52% rise in the price of a legal cigarette. In addition to triggering a flourishing smugglers market, RIU has also witnessed a 132% rise in beedi consumption whilst legal industry sales declined by 28%.

RIU said ongoing research shows that high price differentials between legal and illicit cigarettes caused by poorly-thought-out rash taxation policies have contributed to significant market distortions and growth in smuggling. It opined ill-advised tax increases are a one-dimensional approach to the problem, resulting in lower efficiency of excise tax over the past four years. “It is imperative the Government adopts a pragmatic and comprehensive tobacco policy to maximise revenue and achieve national health objectives, and curb the growth of illicit markets,” the RIU said.

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Developing a sensible stance on tobacco taxation