• Over last 5 years cigarettes prices had gone up 117%
• Beedi market share estimated at 61% in 2019 compared to mere 20% in 2017

Sri Lanka has emerged as the most expensive country for legal cigarettes in 2019, based on purchasing power parity (PPP), causing a 6 percent year-on-year (YoY) decline in the tobacco market share of the country’s monopoly cigarette player, Ceylon Tobacco Company PLC (CTC), as price sensitive smokers shifted towards cheaper tobacco products such as beedi and smuggled cigarettes, according to CTC’s 2019 annual report.

In 2018, Sri Lanka was ranked as the second most expensive country for legal cigarettes; however, tax increases in 2019 has crowned Sri Lanka as the most expensive country for legal cigarettes in 2019 on PPP terms. 

CTC, Managing Director and CEO Nedal Salem told shareholders that the tax hikes by the government on cigarettes in two occasions last year led to the average price of a cigarette to go up by a record 17 percent. 

Further, over the past five years, cigarette prices had increased by more than 117 percent, driven by hikes in excise taxes. 

In 2019, CTC’s market share in the country’s tobacco market reduced sharply by 6 percent YoY to 31 percent while the market shares of ‘under-regulated and under-taxed’ beedi and smuggled cigarettes increased by 6 percent YoY to 61 percent and 2 percent YoY to 8 percent during the year respectively, according CTC data.

“Despite accounting for only 31 percent of the tobacco market, the company contributed nearly 97 percent of revenue from tobacco-related taxes and levies,” Salem said.

The illicit cigarette market in Sri Lanka has estimated to be grown by 45 percent during the year, resulting in a loss of Rs.21 billion in government revenue, as per CTC estimates.

Meanwhile, beedi has continued to cement its market leadership in the tobacco market accounting for estimated 61 percent market share in 2019 compared to mere 20 percent in 2007. 
“The beedi market continues to be under-regulated and under-taxed with only the imported tendu leaves being taxed. In recent years there has also been a spike in smuggled tendu leaf imports, which further deprives the government of legitimate taxes,” Salem pointed out.

Due to lack of taxation, he noted that the price disparity between legal cigarettes and the under-taxed and relatively under-regulated beedi industry has been thriving largely due to tax hikes-induced price increases on legal cigarettes.

In addition to tax hikes, the legal cigarette industry was also significantly impacted by the moderation in consumer spending in the aftermath of Easter Sunday deadly attacks, last year.
CTC saw its sales volumes declining by 17 percent YoY last year, which was mainly due to a 25 drop in its main brand John Player Gold Leaf (JPGL) volumes. 

“John Player Navy Cut (JPNC) and Capstan also recorded volume growth during the year with a certain segment of the market shifting to more affordable legal products in view of the arbitrary excise-led price increases and challenging economic conditions,” CTC noted. 

The company emphasised that the volume decline translated into a drop in State revenue generated through excise, other levies and taxes for the first time.
In 2019, the government revenue generated through excise, other levies and taxes also declined by 4 percent YoY to Rs.105.8 billion compared to the 
previous year.

However, the income tax component rose by 9 percent YoY to Rs.11.4 billion in the year. 

Overall, CTC contributed Rs.120.4 billion to State coffers in the year, down from Rs.125 billion in 2018.

Salem lamented the country’s tobacco control lobby for its narrow approach in reducing tobacco consumption, while claiming this approach had threatened the sustainability of the legal cigarette business, depriving the State of taxes and defeating its public health objectives. 

“Unfortunately, in the past year as well, the efforts of the tobacco control community in Sri Lanka were focussed solely on the legal manufacturer of cigarettes – CTC, while ignoring the growing threats from beedi and smuggled products. Repeated attempts to reduce tobacco consumption through excise and tax hikes have failed due to the absence of a cohesive national strategy to restrict smuggling,” he elaborated. 

Therefore, he urged the government to have a level playing field through the implementation of a more equitable tax framework and evidence-based tobacco control policies and regulations across the board for all tobacco products.

Despite a 17 percent drop in sale volumes, the CTC’s revenue grew by 8 percent YoY while recording one percent YoY growth in profit to reach Rs.92.13 billion in the year.
(NF)