Progressing on previous work on the economic impact of illicit markets, the Research Intelligence Unit (RIU) recently launched its latest report on the economics of tobacco taxation, providing a macro-level overview of the tobacco industry in Sri Lanka, including the growing illicit market.
The report is aided with preliminary results of an ongoing tobacco consumer and retailer primary survey covering the entire island. In order to tackle this growing menace, it is pivotal that we understand the nature of the illicit tobacco market, the impact it has on the local economy and in particular the erosion of fiscal revenue of the Treasury.
The illicit tobacco market has grown in Sri Lanka over the past decade, particularly since 2016. According to the World Health Organisation (WHO), the high price of cigarettes in Sri Lanka makes it the most expensive cigarette in the world, based on Purchasing Power Parity (PPP).
The price of the most consumed cigarette brand in Sri Lanka, John Player Gold Leaf, has increased considerably over the past decade from LKR 20 in the year 2010 to LKR 70 in 2021. A significant component of this increase in price occurred in 2016 where the excise on cigarettes was increased by nearly 50%. Concurrent to this has been the rise of illicit cigarette trade which has skyrocketed from 10% in 2012 to 21% in 2021 according to the RIU.
RIU estimates that as a result of the consumption of 627 million sticks of illicit cigarettes, the Government was deprived of LKR 27 billion in revenue in 2021 alone. This loss is significant and likely to further increase in the coming years if no further steps are taken to control the illicit market. Factoring in the health-related implications, raising prices to deter people from purchasing and consuming cigarettes is prudent, however, a more holistic approach will need to be adopted totackle the illicit cigarette market in Sri Lanka.
According to the RIU’s research, an alarming 56% of people island-wide have admitted to consuming illicit cigarette products at some point in their lives. Despite progress made to cut down the illicit market in the country, it is imperative that the Government continues to adopt a comprehensive, but pragmatic tobacco policy.
Some of the measures recommended by the RIU are:
Setup a dedicated task force to crack downon the illicit market, with extra attention placed on the Central, North Western, Uva and Western provinces. Australia’s example described in the report shows that financial benefits can be expected within just a few years of implementation, easily covering capital and other expenses involved in setting up a task force.
While fixing loopholes in the tax system, the Government must strengthen enforcement by investing in modern equipment for detection, capacity building for officials and increasing incentives. The Government took steps to aid detections by installing high tech scanners over the past decade, however, it needs to be ensured that these are being operated efficiently with adequate staff. For a majority of illicit tobacco consumers interviewed as part of the RIU’s research; friends and family members, particularly travellers, were the primary source of illicit cigarettes. Therefore, seaport and airport enforcement mechanisms need to be tightened to curb the smuggling of illicit cigarettes.
Those engaged in the illicit market see their activities as low risk and highly rewarding. Therefore, penalties should be revisited and made more stringent to increase this risk for potential offenders and to deter such activity. In Sri Lanka, the maximum penalty for smuggling illicit cigarettes is LKR 1 million – a small price to pay for a large-scale operation in which a container of illicit cigarettes can be worth up to LKR 700 million. In Malaysia, the minimum fine was increased in 2019 for smugglers, traffickers, suppliers, and sellers of contraband cigarettes, to USD 25,000 or a minimum jail term of 6 months or both, if convicted.
A total of 29.2% of illicit cigarette smokers interviewed in-depth as part of the RIU survey stated that the significantly lower price of illicit cigarettes makes it a more attractive option. This indicates that addressing supply and pricing issues in the local market will help to address the illicit market. However, quality standards need to be ensured and concurrent measures such as public awareness campaigns are necessary in order to educate the public of overall tobacco consumption risks.
Whilst tobacco products in general poses serious health risks to consumers, illicit products can have even greater risks. Additionally, the RIU’s primary research revealed that unawareness of the legal implications of purchasing/consuming illicit tobacco in Sri Lanka, or the criminality involved with the business of smuggling tobacco and other goods, appears to be widespread across age levels and provinces. A considerable segment (76.1%) of those that were interviewed in-depth by the RIU was unaware of these implications. In order to address both these challenges, public awareness campaigns should therefore be actioned to bridge the knowledge gaps.
Implementing the right measures and tackling the growth of the illicit market will result inachieving the health objectives as well as maximise fiscal revenue for the country. For example, converting 3% of illicit consumption to legal cigarette consumption can recover approximately LKR 4 billion in revenue.