Illicit cigarette market and tax implications

A recent study by the academics of the University of Kelaniya and Open University of Sri Lanka estimates that Sri Lanka lost Rs.18 billion in tax money due to contraband cigarettes in 2018. The law enforcement authorities have seized over 580 million illegal cigarettes smuggled into the country during the same year. However, given the Rs.18 billion number and the ample availability in the market, it can be safely assumed that the majority of the illegal cigarettes smuggled into the country went undetected.

Ceylon Tobacco Company PLC (CTC), a unit of tobacco giant British American Tobacco, holds the monopoly rights to manufacture, sell and distribute cigarettes in Sri Lanka. The company pays nearly Rs.100 billion every year in taxes to the government. An influx of illegal cigarettes hurts CTC’s sales and Sri Lanka’s tax revenue. Hence, it is vital to further equip the law enforcement authorities and Sri Lanka Customs to detect contraband cigarettes and destroy them to plug the revenue leakages. They are already doing a commendable job, given the large amount of illegal cigarettes detained last year. But the abundance of illegal cigarettes in the market questions whether their actions are adequate.

According to the study, the higher price of legal cigarettes and Sri Lanka being an island with a slew of small fisheries harbours, which in most of the times go unmonitored by the law enforcement agencies, evidently help the thriving contraband cigarette market. Also, a significant number of migrant workers, specially in the local construction sector, who come from countries where cigarettes are sold at extremely low prices, add up to this problem. About 25 percent smokers surveyed for the above-mentioned study admitted to smoking a contraband cigarette during a week. It shows the free availability of illegal cigarettes in the local market, which are sold at a significant discount to legal cigarettes.  

The tobacco industry is a controversial topic in Sri Lanka, like in many other countries. Given the grave implications of cigarettes and other tobacco products pose to human health, every effort should be made to discourage smoking. But cigarettes are a legal business in Sri Lanka and the government gets substantial money out of it as taxes. The local cigarette industry is under heavy regulations, where advertising and product promotions are completely banned. Cigarette packs carry large graphical health warnings and several other regulations are also in the pipeline that will further tighten the operating environment for the cigarette industry. 
Further, the government from time to time jacks up the excise and other taxes on cigarettes, which prompts a price hike from the cigarette manufacturer. Hence, it can’t be asking too much from the authorities to rein on the smuggling of cigarettes into the country. Smoking is an adult choice and if someone wants to indulge in it, he or she should be smoking a legal cigarette, being fully aware of its health hazards and not a smuggled, non-taxable cigarette.

But at the same time, every effort should be made to reduce the number of smokers in the country by actively discouraging smoking. If the government increases the taxes on cigarettes with the objective to push the smokers give up the habit, it should make sure that those who give up on cigarettes shouldn’t take up alternatives, which are worse to human health. 

For example, if a cigarette smoker quits smoking cigarettes due to price, he should not take up low-quality contraband fags or ‘beedies’. If that is happening, the government should re-think of its strategy of regularly increasing the tobacco taxes to deter smoking.

In fact, there are products, which are now making waves in the world as safer alternatives to traditional cigarettes. Big Tobacco argue that it is not the nicotine, for which the smokers said to be smoking, but the contaminants of tobacco smoke that are harmful to human health and cause cancer and other serious illnesses. 
The Royal College of Physicians, UK, in a report in 2016 concluded that vaping—the delivery of vaporized nicotine through electronic devices, which are called e-cigarettes, without the tobacco smoke—was safer than smoking. They even went as far as recommending promotion of e-cigarettes to traditional cigarette smokers, as a way of quitting their lethal addiction.

But the Food and Drug Administration (FDA) of the United States looks at e-cigarettes and vaping in a totally different light. The FDA recently said e-cigarettes and vaping products face an “existential threat” in the US, if their use among young people continues to rise. 

In the US, it is not the Big Tobacco but the Silicon Valley start-up companies such as Juul Labs, which are riding the vaping wave. The FDA doesn’t deny the possible benefits e-cigarettes may have for smokers. But its concerns seem to be stemming from the high possibility of minors and non-smokers picking up e-cigarettes and other vaping products.

All in all, it is clear that strict, clear-cut regulations and swift law enforcement actions are vital at least to minimize the severe damage caused by tobacco products to human health. In Sri Lanka’s case, the plugging of revenue leakages appear to be the immediate challenge before the illegal cigarette market, which is unregulated and non-tax paying makes further inroads.