Tobacco trade ills demonstrate gaps in policy framework

BY Patrick De Silva

Given current sentiments and the high inflationary regime of over 7 percent coupled with the slow pace of Foreign Direct Investments, the International Monetary Fund’s growth projection of 4.7 percent for Sri Lanka in 2017 was encouraging and optimistic as espoused by many. 

Whilst overseas investments sit at a marked higher average than what we experienced over the last one and half decades, it is still inadequate to fuel the exponential growth that we seek – to catch up with the tiger economies that once lay in our shadow. Sitting at 110 out of 190 countries on the World Bank’s Doing Business Report for 2017, Sri Lanka has a lot of ground to gain to achieve its target of US$ 4 billion in foreign investments by 2020. Whilst the Chinese and Indians have been kind with investments in infrastructure, some interest from the rest of the global village too is undoubtedly welcome – preferably the Asia Pacific Region. 

Focus on growing domestic 
trade and industry

In this light, and until this comes to pass, it becomes imperative to continue focus on growing domestic trade and industry, and safeguard existing revenue streams to channel them for further growth and expansion locally. However, a closer look at how we fare in terms of protecting legitimate industry, safeguarding intellectual property, investments, ensuring justice, law and order demonstrate why we rank 110th in the global Doing Business index, sitting even below the likes of Rwanda, Mongolia, Nepal and Namibia. Aside attracting further foreign investment, we need to also create a conducive environment for existing investments. Our experience and observations with the local tobacco industry provide ample evidence. 

Ceylon Tobacco Company, BAT’s century old operation in Sri Lanka contributed Rs. 90 billion to government coffers in way of tax in 2016, an increase of almost Rs. 10 billion over the figure contributed in 2015. Historically, the tobacco trade and smokers have been subject to high taxation given the harmful nature of the product, which is acceptable from a health and social safety standpoint.

However, during the end of 2016, the Ministry of Finance imposed a significant hike in tax skyrocketing the price of popular brands to Rs. 50 a stick. The company has since reported significant a drop-in volume, profits a slower growth in revenue. For a company claiming to have contributed Rs. 670 billion to state coffers over the past decade, and infused a further Rs. 11 billion into the local economy in 2016 – this would no doubt have been a rude shock, and suggests that we are on track to cut the head off the goose that lays a golden egg through overpricing and taxing.

But that is just one small part of the problem. On the other hand, Sri Lanka it is reported has emerged a hotspot for the illicit smuggling trade due to its high price on tobacco products. The World Health Organization’s Director General has stressed on governments the need to “clamp down on the illicit tobacco trade, which is exacerbating the global tobacco epidemic”, but we have achieved little in this area, which sends out a negative signal for all legitimate industries and corporates looking to invest in Sri Lanka – that government is not serious enough of safeguarding the interests of a legal trade. Media reports suggest that Customs seized 4 million smuggled cigarettes within 2016, whilst the figure was well over 15 million sticks in just the first quarter of this year. As we all are aware, it is not difficult to source various unauthorized global brands on Sri Lanka’s streets. 

Cottage industry

Smuggling is not the only problem. Beedi, a cottage industry, has also emerged a significant threat to the formal sector. Whilst we still romanticize beedi as a simple cottage trade – there is an emerging school of thought that this by far not the case, and that it hides a well-organised illicit trade. Do we even know how many beedi brands are available in this country? A researcher recently posted a figure of over 25 brands with consumption of over 3.5 billion sticks annually. At just Rs. 5.00 a stick, it is no surprise that my gardener can afford a ‘beedi-break’ at twenty-minute intervals. 

The government tax net does not factor even 33 percent of the entire beedi volume consumed in Sri Lanka. Inaction and negligence lets this product erode government and legitimate industry revenue, pose further health risks to consumers and with it stems the sense that you could get away with anything whilst you are in the informal sector. As per estimates published by the Company, the government will lose Rs. 50 billion annually through illicit cigarettes and beedi. Funds that are necessary to be spent on improving public and investment infrastructure.

 

Sitting at 110 out of 190 countries on the World Bank’s Doing Business Report for 2017, Sri Lanka has a lot of ground to gain to achieve its target of US$ 4 billion in foreign investments 
by 2020

Though controversial in nature, the ills faced by the tobacco trade in Sri Lanka provide ample evidence to a gamut of issues that plague multiple sectors in the country due to imprudent policy, lax regulation and inaction with regards to informal sectors. What is government doing to protect legitimate business and investments? What about their trademarks, copyrights and licensing fees, which no doubt cost millions and their values whistled away by inaction and illicit. 

These factors impact business confidence and naturally, we end up sitting 110th on the global Doing Business index. Sri Lanka aspires to move up almost 35 places over the next three years. But, we are posed with an uphill task to affect the amendments to achieve such change in a short space of time. 
Aside implementing changes, there needs to be an effective process of discussion and planning on the initiatives that need to be taken, which are yet to be seen. Business confidence is not just what foreign investors feel about investing in Sri Lanka, it is also about improving opportunities and confidence for local entrepreneurs and business. We have little time to catch up!

(Patrick De Silva is an attorney-at-law and serves as a regulatory affairs consultant to leading agronomic institutions in Sri Lanka and Australia with over three decades of experience. He can be reached at [email protected])