+353-1-416-8900REST OF WORLD
+44-20-3973-8888REST OF WORLD
1-917-300-0470EAST COAST U.S
1-800-526-8630U.S. (TOLL FREE)

Macro Economic Policy Series 2022: Economics of Tobacco Taxation in Sri Lanka

  • PDF Icon


  • 45 Pages
  • November 2022
  • Region: Sri Lanka
  • Research Intelligence Unit
  • ID: 5711410

As we emerge from a global economic crisis triggered by the pandemic, the current time presents policy makers and business leaders with an opportunity to re-examine some of the perennial issues that have continued to plague the domestic economy. At the frontline of the challenges facing Sri Lanka is that of increasing government revenue by eliminating, or at least minimising the untaxed economy. The consequences of failing to address these leakages in the Treasury will have very significant impacts on the macro economy.
More than ever, policymakers need to address the issue of illicit markets that erode the fiscal revenues of the Treasury. Whilst it is encouraging to note that the Government has accepted and acknowledged the existence of illicit markets in its 2021 budget proposal, policy makers still have ways to go to identify a feasible solution to tackling the menace. Tobacco taxation is a case in point where the politicisation of the issues over many years has resulted in the emergence of a thriving illicit market and a consequent sub-optimal achievement of both the health and fiscal targets.

The report has been compiled using primary data generated from the analyst's consumer survey and all available secondary data from the Government, industry sources and Interviews with Ceylon Tobacco Company PLC as it is the sole licensed manufacturer of cigarettes in Sri Lanka.

The analyst used secondary data from government, and industry sources, as well as primary data generated from the analyst's consumer survey which covers 4 provinces of Sri Lanka.

The purpose of this document is to enlighten readers on the effects of the current tobacco taxation policy in Sri Lanka. It does so by carrying out a comprehensive and detailed treatment of the analysis of tobacco taxation. Using available data for 2021/22, the analyst has carefully and objectively conducted their analysis with a holistic approach that considers tobacco taxation in the context of its entwined relationship with beedi and smuggled cigarettes. 

From the consumption side, we have extracted the findings from our primary research into the consumption of illicit tobacco covering the entire island. This survey of smokers, which has given us unprecedented insights, along with available secondary data forms the basis of our analysis.    

Who Should Read this Report:

Whether you are a policy maker, academic, industry commentator, or student, you will gain valuable insights from this in-depth research.






































Table of Contents

Executive summary
1. Introduction
1.1 Economic overview
1.2 Industry overview and contribution to the economy
1.3 Policy environment

2. Tobacco taxation and its effects
2.1 Tobacco taxation in Sri Lanka
2.2 Tax impacts on pricing
2.2.1 Tax impact on cigarette pricing
2.2.2 Tax impact on beedi pricing
2.3 Tax revenue analysis
2.4 Distributional effects of excise taxation
2.5 Efficiency of excise taxation

3. The nature of the illicit tobacco market
3.1 Overview of the illicit tobacco market
3.1.1 Definition of illicit trade
3.1.2 Common forms of illicit tobacco and identifying illicit products
3.1.3 How smuggling entities work
3.1.4 Scale of the global illicit tobacco market
3.1.5 Control of illicit tobacco
3.2 Illicit tobacco market in Sri Lanka
3.2.1 How illicit tobacco is marketed and sold in Sri Lanka
3.2.2 Prices of illicit tobacco products in Sri Lanka
3.2.3 Detection and enforcement in Sri Lanka
3.3 Size of the illicit market in Sri Lanka
3.3.1 Illicit market during 1995-2021
3.3.2 Estimation of illicit share for 2022
3.4 Global examples of the illicit tobacco market
3.3.1 European Union (EU)
3.3.2 Malaysia
3.3.3 Pakistan
3.3.4 Philippines

4. Why should illicit cigarettes concern Sri Lanka?
4.1 Revenue loss to the Government
4.2 Loss of employment along the value chain
4.3 Increased criminal activity and threat to national security
4.4 Challenges to national health objectives
4.5 Increased smoking prevalence

5. Combating illicit tobacco trade
5.1 Australia’s illicit tobacco taskforce
5.2 Ireland’s holistic approach and effective enforcement
5.3 Track and trace

6. Conclusion and recommendations
6.1 Conclusions
6.2 Recommendations

List of Figures
Figure 1: Annual GDP Growth 2014-2022
Figure 2: GDP per capita (USD) 2014-2022
Figure 3: CCPI and NCPI 2022
Figure 4:  Alcoholic Beverages and Tobacco Inflation 2021-2022
Figure 5: Beedi and Cigarette Consumption historical trends 2007-2022
Figure 6: Exit Prices of a stick of John Player Gold Leaf 2007-2022
Figure 7: Excise tax revisions 2014-2022
Figure 8: Price of a 20-stick pack of the most sold brand in international dollars in 2020
Figure 9: Cross country comparison: GDP vs price of the most sold cigarette brand in 2020
Figure 10: Beedi sticks sold vs Price of a stick
Figure 11: Government revenue overview 2022
Figure 12: Share of Tax Revenue
Figure 13: Share of Excise Tax Revenue
Figure 14: Excise tax contribution to Tax Revenue by Sectors 2007-2021
Figure 15: Government revenue from tobacco taxation
Figure 16: Share of Excise tax and VAT
Figure 17: Tax burden of cigarettes by income groups 2022
Figure 18: RIU Survey 2022 - Illicit tobacco sources
Figure 19: Illicit cigarettes sold via an online trading platform
Figure 20: Total raids 2012-2022
Figure 21: Total sticks detected 2012-2022
Figure 22: Illicit cigarette market share by country 2015
Figure 23:  Illicit cigarettes vs Most Popular Price Category (MPPC) cigarette prices in Ireland
Figure 24: Smoking prevalence in Ireland, 2007-2017

List of Tables
Table 1: Taxes applicable on the tobacco manufacturers and products as of October 2022
Table 2: Tax Revisions 2014-2022
Table 3: Excise tax revisions 2014-2022
Table 4: 2022 tax share of beedi manufactured using locally sourced tobacco (Case 1)
Table 5: 2022 tax share of beedi manufactured using imported tobacco (Case 2)
Table 6: Responsiveness of revenue to tax increases 2008-2021
Table 7: Price comparison of the most consumed illicit vs legitimate tobacco brands in 2022
Table 8: Estimation of the illicit tobacco market in Sri Lanka for 2022
Table 9: Summary of illicit shares over time 1995-2022
Table 10: Illicit market share by Pakistan 2010-2021
Table 11: Calculation of the revenue loss to the Government from illicit cigarettes 2022
Table 12: Financial impact of the 'Black Economy Package - combat illicit tobacco'