New IPS report on ‘Elasticity Estimates for Cigarettes in Sri Lanka’

• New study finds that increasing taxes on cigarettes will have twin advantages of reducing cigarette consumption and increasing Government revenue 
• Calculated tax and price elasticities of demand for cigarettes show that smokers are price sensitive; increasing cigarette taxes by 10% will reduce consumption by 8%
• Simulation exercise shows that when cigarette taxes are raised in line with inflation and streamlined between 2020-2023, Government Excise Tax revenue will increase by Rs. 37 b by 2023 and 140,000 premature deaths from cigarette consumption can be prevented

The Institute of Policy Studies of Sri Lanka (IPS) has released a report which provides a comprehensive assessment of Sri Lanka’s historical and current tobacco tax policies to assess whether they are in line with the World Health Organization’s (WHO) recommended best practices. 

The new report ‘Elasticity Estimates for Cigarettes in Sri Lanka’ is authored by Dr. Nisha Arunathilake, Harini Weerasekera and Chamini Thilanka, and is part of a series of IPS research focusing on Health and Education.

According to the WHO, significant increases in tobacco taxes are the best means of controlling tobacco consumption. High taxes are an incentive for quitting tobacco, reducing consumption, and for not initiating smoking.

The report finds that although cigarette prices have gone up over time, cigarettes are still affordable for smokers as tax increases have not kept up with inflation and income increases. Further, the tax structure is not streamlined, and tax policy changes have been implemented in an ad-hoc manner.

The report provides an estimate of price and income elasticities of cigarettes, and uses these to assess the effectiveness of tax increases on smoking prevalence in the country by conducting a simulation analysis. 

The results show that increasing cigarette taxes by 10% will reduce consumption by 8%. Finally, the study used the estimated tax elasticities to model the health and fiscal benefits of moving to inflation-adjusted and uniform excise tax system over four years. 

Based on the findings, IPS provides recommendations that allow the Government and related institutions to mitigate the negative socio-economic impact caused by tobacco within four years (2020-2023) through an incremental approach to revising cigarette taxes. Adopting a uniform excise tax system that is periodically adjusted for changes in inflation will reduce the affordability of cigarettes. 

Implementation of these recommendations will result in Sri Lanka’s Government revenue from cigarettes increasing from Rs. 95 billion in 2019 up to Rs. 132 billion in 2023; cigarette consumption reducing from 3.1 billion sticks consumed in 2019 to 2.1 billion sticks in 2023; and prevention of 140,000 premature deaths from cigarette consumption in the future. 

The IPS report ‘Elasticity Estimates for Cigarettes in Sri Lanka’ can be accessed online: https://www.ips.lk/elasticity-estimates-for-cigarettes-in-sri-lanka/.