Tobacco and liquor taxes propel Sri Lanka’s economy

Friday, 19 July 2013 04:50 - - {{hitsCtrl.values.hits}}

By Ashwin Hemmathagama Excise tax increases on tobacco and liquor is one of the popular mechanisms the Government resorts to in order to raise revenue at short notice. Generally, via a mere announcement made late in the evening by publishing a Gazette Extraordinary, new taxes are imposed overnight to collect revenue. Although it is a violation of the fundamental principle of ‘taxation by consent,’ it’s an important step necessary to curtail a considerable part of the surging budget deficit triggered by the unimpeded spending by all successive Governments.

In 2005, the cigarettes and tobacco excise tax contribution to State coffers stood at Rs. 26,992 million and gradually increased during the past seven years, enabling smokers to be the silent stakeholders of the national development drive and also to be among the few largest contributors to the GDP. Last year, smokers contributed over Rs. 53,563 million, which is an increase of over 10 times, compared with the contributions made in 1990. In 2012, the excise duty hike on tobacco and related products came almost a month before the Budget 2013 was presented to the Parliament on 8 November 2013. Excise duty was increased for tobacco in cigars to Rs. 7,000 per kg from Rs. 5,500 per kg reported in March 2012. Tax on cigarettes between 72 and 84 millimetres was also raised to Rs. 14,963 per 1,000 from Rs. 13,815 and for cigarettes of over 84 millimetres, from Rs. 17,100 to Rs. 18,500, according to reports. Since the end of the war in 2009, almost all liquor companies have extended their marketing to all parts of the island enabling the Excise Department to collect Rs. 36,666 million as duties during 2010 – an increase of 28% over the revenue collected in the year before. An increase in production of hard liquor and soft liquor has been shown in 2010 over 2009. The reasons for this increase are removal

of obstacles for liquor sales in the northern and eastern areas, restoration of law and order in those areas, the increase of tourist arrivals and the intensive raids carried out by the Excise Department and Police Department, causing a decrease in the illicit liquor supply. This fact has been proven by research carried out by the Colombo University in the Western and North Western Provinces where 44,599 excise raids were carried out by the Department in 2010. Regardless of the strong financial influence of the tobacco and liquor sector being used by the Government to bridge its fiscal deficit, efforts to discourage smoking and to stall the industry were unleashed as a part of the political manifesto, the ‘Mahinda Chinthana,’ which promises to end the dope menace by legislation. As a result, vigorous programs of different types and scales were unleashed in parallel to the introduction of laws prohibiting advertising, sale to minors, smoking and drinking in public places, and creating a public consensus highlighting the health hazard to drastically change the smoking and drinking habits of Sri Lankans and ultimately, create a tobacco-smoke-free country regardless of

the practicalities. Tobacco and liquor industries contribute heavily to GDP by providing the necessary taxes to the Government. These taxes drive the economy and revenue is funnelled back to the general public in terms of development programs of different scales and equations. Tobacco is addictive and generally said to have inelastic demand as people find it difficult to kick the addiction, but in Sri Lanka tobacco smoking has been in long-term decline. In the event the use of tobacco and liquor reduces significantly, the authorities will have a widening deficit at their feet with no solution but to strengthen the indirect taxes on all goods and services imaginable. Such indirect taxation will boost the prices of consumer items including essential services, where further escalation of inflation will be unavoidable and will contribute to starting a chain reaction and also the collapse of the economy, making Sri Lanka nothing more than a failed economy or a banana republic.