Sri Lanka’s tobacco tax and excise policy: some issues



by Tishani Sripathi


Taxation from tobacco is a significant source of revenue for governments in both the developing and developed world. In Sri Lanka, excise tax increases on tobacco and liquor is one of the most popular tools which the government resorts to in order to raise revenue at short notice. Typically, this is done via an announcement made late in the evening by publishing what is known as a Gazette Extraordinary, whereby new taxes are imposed overnight to collect revenue. Although this is a violation of the fundamental principle of ‘taxation by consent,’ it is a step often taken to restrain an extensive part of the swelling budget deficit triggered by the unhampered spending by the government.


Government tax revenue from cigarettes has seen a quick and steady increasing trend over the years. It was Rs. 80 billion in 2015 and in 2016; it was nearly Rs. 90 billion. This is an astonishing figure, in comparison with a little over ten years ago, when the tobacco excise tax contribution to state coffers stood at a mere Rs. 26.9 million. The current figures reflect an increase of over 10 times, compared with the tobacco tax contributions made in the year 1990.


Regardless of the strong financial influence of the tobacco and liquor sector, and the fact that both industries are used by the government to bridge its fiscal deficit, efforts to stall the tobacco and alcohol industry were revealed as a part of the political manifesto during the previous government’s rule. These efforts have continued as part of the manifesto of the present government, which is also championing a complete tobacco cultivation ban by 2020.


Tax hikes only impact the legal cigarette industry and government revenue, and high prices of legal tobacco unsurprisingly attract criminal elements that push counterfeit and smuggled tobacco products. The 43 per cent increase in the price of cigarettes during the last quarter of 2016, meant that Sri Lankan cigarettes are now the second most expensive in the entire world. As a result, Sri Lanka has since seen a surge in illicit tobacco trading. In the first half of 2017, Customs officials detected 40 million sticks, compared to a total of 4 million sticks detected in the full year 2016. However, with only one in ten smuggled fags being detected an estimated 360 million illegal cigarettes with market value of Rs. 18 billion have already entered the market during this period alone. As such, the Sri Lankan government is estimated to have lost over Rs. 14.5 billion in tobacco revenue for the period.


According to recent reports shared by the STF, a series of raids had uncovered over 280,000 sticks of illicit cigarettes. Airport Customs officials have also captured huge quantities of illicit cigarettes, up to 100,000 in numbers. All of this was uncovered within a four-day period. Considering the above mentioned statistic of only 1 in 10 illicit sticks being detected, these significant detections show that illicit cigarettes are widely available and easily accessible around the island. Again, the loss to the government in terms of tobacco revenue is substantial.


Additionally, despite the government’s heavy regulations and stringent taxation on legal cigarettes, overall smoking rates in the country have increased, driven mostly by the record high levels of easily accessible smuggled cigarettes that have been flowing into the country. With illicit fags being sold at cheaper rates, at about Rs. 25-35 a stick in contrast to a legal cigarette which sells at Rs. 50 a stick, one can make the conclusion that the prevalence of smoking in Sri Lanka is directly linked to the easy accessibility and affordability of illicit cigarettes.


With the many campaigns being run by the anti-smoking community in the country as well as the pictorial health warning printed on the cigarette packs manufactured locally, anyone will know the risks associated with smoking. Despite this however, consumers still choose to smoke. If legally manufactured cigarettes are too expensive for them, they will move on to other cheaper products, and Sri Lanka has many such alternatives available.


To completely ban tobacco and alcohol would be futile and impractical, not to mention preventing people from the right to make conscious, informed choices regarding their lifestyles and consumption preferences. In addition, the authorities will have a widening deficit at their feet with no solution but to strengthen the indirect taxes on all goods and services possible, which has a negative impact on the financial health of the Sri Lankan people. Such indirect taxation will boost the prices of consumer items including essential services, where further escalation of inflation will be unavoidable and will eventually contribute tothe collapse of the economy.


It is essential that the government of Sri Lanka and other relevant authorities take steps to address this problem and re-look their strategy of taxation and regulations. Simply increasing regulations on the legal industry does not curb rising smoking rates and corruption funded by profits from the illicit trade. Instead, in order to make positive and sustainable change, they will have to re-assess their plans and find an appropriate mechanism to control the tobacco industry and effectively work towards their goal for a healthier and more financially secure Sri Lanka.


Tishani is a law student and business writer. She can be reached at sripathitishani@gmail.com


 


 
 
 
 
 
 
 
 
 
 
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