Tuesday Oct 13, 2026
Tuesday Oct 13, 2026
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British American Tobacco Head of Fiscal Policy Prashanth Karuthasen
By Nisthar Cassim
Ceylon Tobacco Company PLC (CTC) is calling for a balanced approach in Sri Lanka in terms of taxation of legal products and enforcements on illicits, which have seen sharp growth over the last decade.
The consumption of legal products has been on the decline in Sri Lanka due to stretched consumer affordability driven by excise-led increases in price. However, smoking has increased relatively due to a thriving illegal and illicit market and availability of more affordable alternatives such as beedi.
“The high price and tax differential between illicit and legal products is an incentive for smugglers to operate. Whilst a higher level of enforcement helps, the profit incentive has to come down sufficiently in order to deter smuggling and illegal and illicit trade thriving which impacts Government revenue,” said British American Tobacco (BAT) Head of Fiscal Policy Prashanth Karuthasen in an exclusive interview with the Daily FT during a recent visit to Colombo.
Noting that the operating environment for the CTC has been satisfactory, the BAT official said fair or reasonable taxation balanced with better enforcements help reduce the illicit trade, which in turn will boost Government revenue by ensuring consumers purchase legal products.
As per estimates, the broader cigarette consumption in Sri Lanka is around 9 billion sticks. Of that, legal trade is just under 2 billion (1.92 billion in 2025) or about 20% of overall tobacco consumption. Illicit cigarettes amount to 500 million sticks, whilst beedis account for approximately 6.5 billion sticks, or around 73% of the estimated combustible tobacco market. The CTC contributed approximately Rs. 173.8 billion to Government revenue in 2025, representing nearly 4% of total Government revenue. This contribution was approximately six times the company’s profit of around Rs. 29 billion for the year, underscoring the significantly higher fiscal contribution generated by the legal cigarette sector compared to earnings retained by the company. The CTC’s contribution to Government revenue increased by nearly 8%, from approximately Rs. 161 billion in 2024 to Rs. 173.8 billion in 2025. In comparison to 2021, the revenue for taxation on legal cigarettes has increased by Rs. 63 billion in 2025 for the Government. Last year’s tax revenue from the legitimate cigarette industry was six times the after-tax profit of the CTC, which was Rs. 29 billion.
Speaking on the affordability of the legal cigarette in Sri Lanka, Karuthasen added: “So the affordability is a big driver of illegal consumption, as we see it, and that in turn has an impact on potential higher tax revenues. Consumption of legal sticks has come down to just under 2 billion from nearly 3 billion in 2022. Even though taxes are going up, you are not really impacting overall consumption patterns because consumers are just switching to illicit and illegal products. If the legal cigarette market continues to decline at a very fast rate, how sustainable does that become in the medium to long term is a big question for Sri Lanka.”
Only around one in five countries meet the World Health Organisation’s (WHO) 75% tax incidence target, and the majority of those countries are high-income economies within the European Union (EU). Excluding them, the number of countries that implement the recommendation falls to 1 in 10. The latest WHO data puts average global cigarette tax incidence at around 58%. Sri Lanka is materially higher than the global average. Sri Lanka ranks fifth in the Southeast Asia region on tobacco tax incidence and is already well above the global norm. Sri Lanka currently also has a Corporate Income Tax of 45% on tobacco, which is one of the highest corporate tax rates in the world. This contribution alone in 2025 amounted to nearly Rs. 25 billion. If all taxes paid by the tobacco sector are included, together with corporate taxes, taxes account for more than 80% of the retail price.
The BAT official cited the case of Malaysia, which has implemented the WHO recommendation, but has a 60% illicit share in the country. “So, they have got a rapidly declining legal market, a rapidly growing illicit market, and tax revenues have been suffering in Malaysia for quite some time,” the BAT Head of Fiscal Policy said.
Karuthasen also cited the UK and Australia, both of which impose comparatively high taxes on cigarettes. According to the estimates referenced by the BAT official, illicit cigarettes account for approximately 32% of consumption in the UK, while Australia’s illicit market is estimated to represent more than 60% of cigarette consumption. He maintained that these examples demonstrate the need for tobacco taxation to be accompanied by effective enforcement and measures to reduce the profit incentive available to illicit traders.
“What generally works quite well in terms of fiscal policy is transparency, moderation, and predictability. This ensures that your profit incentive for a smuggler is not massively wide from one year to the next, and you’re able to continually improve on your enforcement angle to then get the problem under control,” the BAT Head of Fiscal Policy added.
He said that BAT as an investor in Sri Lanka, whilst seeing a lot of changes within the overall market, believes there is definitely still a lot of value in the Sri Lankan business and the value added to the country’s GDP.
Karuthasen further added that the long-term sustainability of the business will be dependent on how tax policy is shaped over the coming years.
