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Saturday, September 23, 2023

Sri Lanka to Hit Smokers, Drinkers with Index Linked Taxes

The Sri Lankan government has announced its plan to increase taxes on alcohol and tobacco, with taxes linked to inflation starting from January 1, 2024. The International Monetary Fund (IMF) program declared the intentions, stating that the first increase was implemented on January 1 for tobacco and January 3 for alcohol, and the second increase will be implemented before the end of June 2023. The government aims to raise tax revenues to 15% of the country’s GDP by 2025, and this move is expected to generate more income for the state coffers.

Sri Lanka’s Tobacco Tax at a Tipping Point

Sri Lanka is considered an anti-tobacco activist’s dream destination. The country has 80% graphic health warnings on cigarette packs and restrictions on sales, making it the most restrictive market for cigarettes in the world. Additionally, the government has further increased the excise tax on tobacco and alcohol products by 20%, making it the most expensive cigarettes in the world. Even one cigarette can cost a daily wage earner close to 10% of their earnings per day.

However, the excessive tax rates have created a thriving black market for cigarettes, causing a significant loss to the government. According to a report by the Research Intelligence Unit (RIU), Sri Lankans smoke over 540 million smuggled cigarettes annually, causing Rs. 32 billion in losses to the government. Bhutan’s example of a complete ban on sales in 2010 and its subsequent reversal in 2020 after creating a thriving black market and causing significant losses to the government and a spike in crime should be a lesson for Sri Lanka.

Furthermore, policymakers are mum on the growth and impacts of the beedi trade, which is a far greater market than cigarettes. Sri Lanka’s beedi trade is completely unregulated and undertaxed, with producers mushrooming all over the country to take advantage of smokers downgrading to beedi due to the excessive cost of cigarettes. The public continues to smoke cheaper cigarettes and inhale the ill-effects of tobacco that has evaded quality assurance, while the government earns significantly less revenue due to its short-sighted policies and inaction.

Impact on Tourism

Sri Lanka’s focus on tourism as a foreign exchange earner is impacted by high taxes on tobacco products. The country has seen a surge of visitors from Europe, primarily Russia, and more are expected from China and India. A common trait amongst travellers from these regions is that they are heavy smokers, with smoking incidence over 26%. How would a high price regime on tobacco products impact tourists when the average daily spend of tourists in Sri Lanka is not more than $20? Sri Lanka must adopt a more cohesive approach to its tax policy and enhance categories identified as key income earners, and for tourism, tobacco is a vital player.

Tobacco Tax Formula

According to reports from Health Ministry officials, the regulatory body envisages a tobacco tax formula that will ensure an annual price increase on par with inflation – which currently sits above 50%. They added that despite the latest increase, the government will fall short of its revenue target and envisages increasing taxes by over 100%. However, a further price increase this year, without considering the impact on volume, would enhance government revenue by a projected Rs. 48 billion.

Sri Lanka’s increase in taxes on alcohol and tobacco is aimed at increasing tax revenues to 15% of the country’s GDP by 2025. However, the excessive tax rates have led to a thriving black market for cigarettes, and policymakers are ignoring the growth and impacts of the beedi trade, which is a far greater market than cigarettes. The government needs to adopt a more cohesive approach to its.

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