Illicit cigarettes boom as Government loses Rs. 18 b in tax revenue

A recent investigation conducted by a group of three academic researchers on the illicit cigarettes in Sri Lanka concluded shocking tax revenue implications for the country. 

According to the findings of the study, illicit cigarettes account for 15.6% of total cigarette consumption in the country, which translates to 583 million sticks being smoked in 2017, causing a Rs. 18 b revenue loss to the State. This draws attention to a longstanding issue that directly affects the national economy.

According to Article 1 of the WHO Framework Convention on Tobacco Control (FCTC), illicit tobacco trade is defined as any practice or conduct prohibited by law, which relates to production, shipment, receipt, possession, distribution, sale or purchase of tobacco products including any practice or conduct intended to facilitate such activity. 

According to the findings of the study, illicit cigarettes account for 15.6% of total cigarette consumption in the country, which translates to 583 million sticks being smoked in 2017, causing a Rs. 18 b revenue loss to the State. This draws attention to a longstanding issue that directly affects the national economy

The report launched on 7 January computed the tax losses in order to determine the additional revenue that could have been generated by the Government if the volume of illicit cigarettes consumed were manufactured locally. It estimated the revenue losses for 2017 under three scenarios:

Cigarette butt collection – 15.6% translating to a revenue loss of Rs. 17.98 b

Empty pack survey – 10.80% translating to a revenue loss of Rs. 11.81 b

Average – 13.19% translating to a revenue loss of Rs. 14.89 b

In order to gather these findings, the group used a multitude of methods. As illicit traders maintain clandestine operations, they do not keep track of their sales; thus the research team had to resort to measures such as collecting empty packs and cigarette butts as well as interviews with law enforcement authorities. In addition, they also interviewed a series of smokers, out of which 28 percent claimed that they had consumed illicit cigarettes during the week prior to the interview. This averages out to at least one of four smokers consuming one illicit cigarette during the previous week.

The researchers further stressed that the scenario based on cigarette butt collection is most accurate as illicit cigarette traders rarely sell in pack form due to the fear of being detected and ensuing legal implications. Thus, the researchers noted that market share based on the empty pack survey is underestimated.

An assumption currently exists that increasing taxes on cigarettes would deter smokers due to high prices. However, the research found that it is misleading to use declining sales in legitimate cigarettes as an indication to a decline in overall smoking in the country. As the prices of cigarettes increase, the researchers have found that most consumers may simply move to illicit productsdue to lower than average market prices resulting in further negative implications.

This is further cemented when analysing the global arena; statistics show that worldwide tobacco tax hikes have led a rise in illicit trade, facilitated by organised criminal networks. The report further states that the negative deviations of actual cigarette revenue from collected budgetary forecasts over the years, as measured by percentage errors, indicates the presence of the illicit cigarette trade.

The researchers further highlight that recent technological and communication advancements are leaning in favour of smugglers. Coupled with globalisation factors, smugglers now have an ideal environment to carry out their operations. In the Sri Lankan context, there was always a lack of research based information on this topic thus policy makers had a weak foundation to base effective policy level changes that would further strengthen and support their efforts to curb the effects of the illicit cigarette trade. 

Given the attractive incentives available from the illicit cigarette trade due to higher tax rates, exorbitant profit margins, regulatory loopholes and easy transportability of products, the group has set forth a number of recommendations to be followed by the Sri Lankan Government in order to curb the effects of the expanding illicit cigarette market. The researchers strongly urge the enforcement of already existing laws pertaining to smuggling as well as the imposition of rigorous investigation procedures and criminal prosecution in order to help streamline detection, seizure and destruction of illicit products such as these

Given the attractive incentives available from the illicit cigarette trade due to higher tax rates, exorbitant profit margins, regulatory loopholes and easy transportability of products, the group has set forth a number of recommendations to be followed by the Sri Lankan Government in order to curb the effects of the expanding illicit cigarette market. 

The researchers strongly urge the enforcement of already existing laws pertaining to smuggling as well as the imposition of rigorous investigation procedures and criminal prosecution in order to help streamline detection, seizure and destruction of illicit products such as these.

Since the study has found that higher taxation on legal products influences smokers to switch to cheaper products and illicit cigarettes, it is wiser to streamline the existing legislation to curb smuggling and other trading activities through severe punishments. The report also recommends broadening the coverage of tobacco tax to include substitute products including beedi and cigars, which smokers can turn to as cheaper alternatives.

Improving infrastructure that would support investigations through state-of-the-art anti-smuggling technology such as X-ray scanners, endoscopes, mirrors, night vision equipment and advanced cameras; and building capacity of law enforcement agencies to control smuggling and trading of illicit cigarettes are also key recommendations made by the research team. 

In addition, the academics went on to cite the FCTC protocol of the WHO to eliminate the illicit tobacco trade especially with regards to establishing track and trace systems to have a tighter grip on the supply chain while strengthening law enforcement with international cooperation. The researchers are confident that if all of the above is taken into consideration, the negative tax implications on Sri Lanka can be greatly reduced.