By: Staff Writer
January 16, Colombo (LNW): The recent hike in cigarette taxes in Sri Lanka aims to enhance government revenue and reduce smoking rates. However, its effectiveness is shaped by consumer behavior, market trends, and enforcement against illicit trade.
According to the Alcohol & Drug Information Centre (ADIC), the latest tax increase has allowed cigarette companies to earn an additional Rs. 7 billion in profit.
While the tax on the most popular cigarette category rose by Rs. 4.51 per stick, retail prices increased by Rs. 10 per cigarette, enabling companies to capture substantial profits.
ADIC attributes this to inefficient tax collection systems, which persist regardless of changes in government leadership.
Tobacco and alcohol consumption in Sri Lanka have significant public health consequences. Smoking causes nearly 20,000 deaths annually, while alcohol consumption accounts for around 15,000 premature deaths. Despite these figures, tax hikes on these products show mixed outcomes.
For instance, a 20% alcohol tax increase in 2023 reduced alcohol consumption by 8.3 million liters while boosting government revenue by Rs. 11.6 billion. Similarly, cigarette excise revenue increased by Rs. 7.7 billion, even with a decline in cigarette sales. These trends highlight the dual impact of taxation on consumption patterns and state revenue.
In July 2023, Sri Lanka implemented another 20% cigarette tax increase, with specific rates varying by product size. However, the Ceylon Tobacco Company (CTC) reported a decline in both sales volume and revenue in early 2024 compared to the previous year.
Revenue dropped from Rs. 46.93 billion to Rs. 45.85 billion, and turnover-linked taxes fell from Rs. 34.2 billion to Rs. 31.7 billion. This decline is attributed to reduced cigarette consumption, a shift to cheaper alternatives like beedi, and increased smuggling.
Over the long term, however, cigarette tax revenue has shown a positive trend. Between 2015 and 2023, revenue from cigarette taxes grew from Rs. 81.15 billion to Rs. 110 billion, despite a notable decrease in cigarette consumption.
The effects of cigarette tax increases can be summarized as follows:
Economic Impact: Higher taxes aim to boost government revenue, but reduced legal sales and shifts to untaxed alternatives like beedi or smuggled cigarettes may undermine this goal. Illicit trade also negatively impacts the broader economy.
Corporate Outcomes: Although CTC experienced reduced sales and revenue in early 2024, the company increased its profits from Rs. 5.999 billion to Rs. 6.8 billion by cutting costs. This occurred despite rising expenses for wages and raw materials.
Consumer Behavior: Rising cigarette prices due to tax hikes have led many consumers to reduce consumption, opt for cheaper alternatives, or turn to smuggled products. These shifts may impact public health negatively if consumers choose more harmful substitutes and can also reduce government revenue from taxed products.
While cigarette taxes have proven effective in reducing consumption and increasing state revenue over time, their success hinges on strong regulatory enforcement, minimizing illicit trade, and addressing market shifts to untaxed alternatives.
