Govt. to lose Rs. 50 b in revenue from tobacco in 2017

As customs seized 3.5 million illegal cigarette sticks at the Colombo Port on Wednesday, Sri Lanka’s sole legal manufacturer of cigarettes reported that the Government will lose Rs. 50 billion in revenue in 2017 due to disproportionate taxation. Speaking to the Daily FT when contacted with regards to the rise in tobacco smuggling, company officials pointed out that while four million illicit sticks were detected in 2016, within the first two months of this year already 10 million illegal sticks have been detected as smugglers find Sri Lanka a lucrative destination given the exorbitantly high prices of sticks. Accordingly, it is estimated that 1 in 10 cigarettes in the market currently are smuggled. 

On top of a 30% drop in sales of legal products, plus an estimated Rs. 16 billion loss to the Government as illicit cigarettes grow by over 1,300%, the real returns of increased taxation to dissuade smoking comes into question. 

The consumption of beedi too is reportedly up by 25%, with the industry using local substitutes in place of the tendu leaves usually imported from India, again resulting in loss of tax revenue to the Government. Accordingly, CTC estimates show that the Government will lose close to Rs. 50 billion in projected revenue from the industry this year, as high prices drive consumers underground. 

The decline comes after the Government price hike in October last year, as volumes declined sharply in the last quarter resulting in an estimated Rs. 11 billion in tax revenue that quarter. At pre-October 2016 rates, the CTC says the Government would have earned a record Rs. 127 billion in revenue this year, but will now lose significant ground to illicit stocks. 

With Sri Lanka being a market largely driven by stick sales, the Health Minister’s recent claims of a draft Cabinet paper proposing a stick sales ban will pile further pressure on the legal industry and Government revenues. With increasing activity by smugglers and the cost of enforcement coupled with flagging revenue, it will be interesting to note what action lawmakers take to control the situation.