Fragile economics of tobacco taxation in Sri Lanka

The recently published 2024 financials of Ceylon Tobacco Company PLC (CTC), the legal manufacturer of cigarettes in Sri Lanka, offer more than just a snapshot of corporate performance—they underscore a critical question: can Sri Lanka continue to rely on a shrinking, heavily taxed legal cigarette industry to drive public revenue? This challenge is posed in a backdrop where it is estimated that the Sri Lankan Government makes ~6% of its total revenue from the legal cigarette industry. 

On the back of successive excise increases in 2023 and 2024, 2025 saw an increase in excise of ~6%. As disclosed at the Committee of Public Finance, this increase is 4% above inflation. Consequently, CTC reported a dip in net profit for Q1 2025 of Rs. 6.7 billion. While much of the public conversation has focused on CTC’s profit levels, what’s often overlooked is the Government’s gain. In the first quarter alone, the company’s contribution to Government revenue—excluding income tax—rose by 5% to Rs. 34.1 billion. That’s more than five times the company’s net profit for the same period, underscoring the industry’s outsized role in public finance.

According to CTC’s 2024 Annual Report, total domestic cigarette volumes fell from 2.3 billion sticks in 2023 to 1.91 billion in 2024, a decline of approximately 17%. Conversely, the same Annual Report estimates that the smuggled cigarettes volume for 2024 stood at 1.2 billion, nearly 40% of the total cigarettes consumed in 2024. The volume contraction of legal cigarettes signals weakening demand in the legal market, raising questions about the long-term sustainability of the industry as a reliable revenue source for the Government.

In addition to the challenges posed by the smuggled cigarettes the tobacco industry has seen a sharp rise in the consumption of beedi. This is fundamentally driven by price pressures on consumers in April 2025, the Government increased the per stick tobacco tax on beedi from Rs. 2 to Rs. 3. While this move is a step in the right direction there needs to be serious overhaul in the enforcement measures in the beedi industry in order to ensure actual generation of revenue from the category. 

It is commendable that the Government has looked at generating revenue from this otherwise untapped category of tobacco products but stricter enforcement, harsher penalties for non-compliance and formalisation of the industry is critical to drive real change. A beedi stick is sold to retailers at Rs. 4-5 which is clear evidence of the fact that the tax is not paid in full.

The informal nature of the beedi sector means most of this potential revenue never reaches Government coffers, allowing an entire segment of tobacco consumption to remain untaxed but add to the public health bill of the Government.

Beedi also carries significant public health concerns due to the absence of product regulation and quality standards. Majority of beedi manufacturers do not comply with health warning requirements and the low pricing makes the products extremely affordable to younger citizens. Formalisation of the industry will not only ensure revenue collectability but also result in restricting access. 

Stronger enforcement measures against smuggled cigarettes are a must to deter smuggling into the country. Curtailing smuggling at points of entry is the only sustainable way in which the illegal industry can be culled.  

The enforcement and fiscal policy must work hand-in-hand in order to deliver Government revenue targets that can significantly address the need of the hour. There needs to be a clear understanding by policy makers that constantly increasing prices of the legal cigarettes only creates further motivation for smugglers to build a thriving illegal market. 

Looking ahead, Sri Lanka must develop a more balanced approach. Supporting the sustainability of the legal cigarette industry, while ensuring a level playing field through equal taxation of all tobacco products, is critical.