RIU’s latest research report calls for pragmatic tobacco tax policy

By Shabiya Ali Ahlam
A Colombo-based research firm yesterday charged that the government’s failure to address the issues relating to the highly debated tobacco tax policy has led to a shift towards illicit products, which has already resulted in a considerable loss in tax income to the government.

The Research Intelligence Unit (RIU) in its most recent study highlighted that given the prevalence of many loopholes in Sri Lanka’s current tobacco tax regime, the delay in ironing out such has led to lower efficiency of excise taxes overtime.

“The high price differentials between legal and illicit cigarettes caused by taxation have contributed to significant market distortions and growth in smuggling. Cross-country experiences explored also established the connection of high taxes and illicit growth,” said RIU Research Economist 
Lalinda Sugathadasa. 

As per RIU’s estimations, the revenue loss to the government in 2019, due to the high tax slapped on cigarettes, is over Rs.14 billion, which is said to be equivalent to 36 percent of the annual Samurdhi spending. Meanwhile, the revenue loss for the legal tobacco industry is calculated as Rs.24 billion.

Noted is also that Rs.800 billion tax revenue is lost from the under-regulated beedi industry.

The annual income generated by the formal tobacco is estimated to be around Rs.144 billion.

“It is imperative the government adopts a pragmatic tobacco policy to maximise revenue, achieve national health objectives and curb the growth of the illicit tobacco market,” stressed Sugathadasa during the launch of the RIU report titled ‘Macroeconomic Policy Series: Achieving Objectives with Tobacco Taxation’.

He stressed that the current excise taxation puts a greater burden on low-income groups than the upper-income groups, eroding the real income of low-income individuals. He noted that such would have serious implications in terms of increased poverty levels. 

According to RIU, some of the measures the government should consider include having the tobacco tax indexed to inflation, instead of ad hoc increases, adopting a more prudent and open tobacco policy that would result in a win-win scenario for both the national health objectives and fiscal space and ensuring statutory oversight to monitor the unregulated informal sector.

RIU’s team of researchers and economists asserted that illicit cigarette should be a major concern since it challenges national health objectives, has led to increased smoking prevalence (14 percent, according to the WHO) and a revenue loss to the industry and government.