Government to lose Rs. 90 b in Excise revenue due to disparate taxes

By Ajith Perera

Excise tax has for long been a cornerstone of Government revenue, but thanks to disparate taxation and policy, the Treasury is incurring colossal losses at a time income has become an urgent need. 

Recent media reports cited that the Government will lose Rs. 50 billion in revenue from the legal tobacco industry due to excessive taxation, as Customs officials yesterday pointed to a growth of almost 2,000% in illegal cigarette smuggling over January and February 2017. The growth of illicit follows the increase in price of cigarettes following tax by 43% in October 2016.

However, despite the heavy losses already incurred during the final quarter of 2016 and at present, it is reported that Minister Rajitha Senaratne is proposing a ban on stick sales. In Sri Lanka, as per the Annual Report of Ceylon Tobacco Company, 95% of cigarette sales come in loose form. This is due to a combination of economic and lifestyle factors with pack sales limited even amongst the elite.

At Rs. 50 a stick, the second most expensive in the Asia-Pacific region, a packet of cigarettes cost Rs. 1,000, which is far too expensive for daily purchase by low-income earners. Should a stick sale ban come into effect, and if this were to cut consumption by one billion sticks from its current number of three billion, the Government will incur a further loss of Rs. 40 billion this year. That then accounts to a combined loss of Rs. 90 billion in a year due to a disparate taxation and draconian measures.

The high price has already driven consumers underground to smoke illicit, whilst transforming Sri Lanka into a smugglers’ paradise, and should a stick sales ban also come into effect on top of that traders, consumers and smugglers alike will resort to further unscrupulous strategies that will merely add to the Government’s revenue and enforcement miseries. 

Sure, the Health Minister would argue that a reduction in smoking would develop a healthy Sri Lanka. But then if illicit is growing at 2,000% with only one in 10 smuggled sticks detected as per Customs, is the policy really achieving its stated objective? 

What’s more, there is no available data at the Ministry, the Treasury or the hospitals as to what is the real loss to the Government as a direct result of smoking. 

Smoking is harmful to health and there is no doubt of that but it remains an informed adult choice. Every smoker is aware of the multitude of risks tobacco consumption poses but chooses to do so for several lifestyle or other reasons. Thus, if an adult were to make an informed choice to purchase a legal product – is it ethical for policymakers to place draconian restrictions on its purchase, and what’s more is it prudent for Government to shoot itself in the foot at a time when it’s in dire need of revenue?

After all, the losses it incurs from one sector has to be recovered from another, and the public will surely have to pay for that and this time it would include non-smokers too.

If at all, authorities need to make a concerted effort to control illicit and smuggling. At the current rate, over 600 million illicit cigarette sticks will enter Sri Lanka this year resulting in a loss of Rs. 30 billion to the Government. Customs officials said they have detected over four billion sticks over the last months, which is unprecedented in our history. In addition, illicit sticks are poorly manufactured with no adherence to quality, which will further exacerbate the health risks that the ministry is shouting about. 

National policy must be prudent and practical, it must serve the greater good of the nation. It must not serve the whims of individuals or groups at the expense of the public. However, the actions so far with respect to excise leave much to be desired in terms of revenue outcomes, and a stick sale ban – if it were to become reality – will no doubt put the rationale of the Government’s policy machinery into real perspective. A Rs. 90 billion loss is no piece of cake, for our sake let’s hope they get it right.

(The writer is Retired Administration, Shipping and Maritime Security Consultant in Sri Lanka and the Middle East.)