Annual government loss due to illicit cigarettes is Rs 18 billion – Report

Research Report on Sri Lanka’s illicit cigarette market unveiled

A report based on a study concerning Sri Lanka’s illicit cigarette market by three eminent professors, was launched today (07th January 2019) at the Senate Room of the Open University of Sri Lanka. The report, titled ‘A Baseline Study on the Illicit Cigarette Market and the Resulting Tax Implications for Sri Lanka’, denotes the culmination of a detailed study conducted by a team of academics led by Dr. S. N. Morais, Prof. S. S. Colombage and Dr. C. N. Wickramasinghe. Illuminating on a number of shocking factors with statistics, the report draws attention to a longstanding issue that directly affects the national economy. The report states that advancement in technology and communication networks as well as globalization factors have opened new avenues in favour of smugglers, providing an ideal environment for illicit trade to thrive. Among such trades, the smuggling of cigarettes is rapidly on the rise with the potential to bring about dire consequences, if not curbed. In the Sri Lankan context, despite the efforts of Law Enforcement Institutions to stop the flow of illicit cigarettes into the country, the absence of accurate, research-based information in this space meant that policy makers are unable to bring about effective policy level changes that would further strengthen and support these efforts. Having understood this void, the academics took on the task of delving into the subject of illicit trading in cigarettes, with the objective of providing much needed policy recommendation to fight illicit trade. The illicit tobacco trade is defined in Article 1 of the WHO Framework Convention on Tobacco Control (FCTC) as any practice or conduct prohibited by law which relates to production, shipment, receipt, possession, distribution, sale or purchase of tobacco products including any practice or conduct intended to facilitate such activity. With the aim of shedding light into this elusive yet menacing subject, the study on Sri Lanka’s illicit cigarette market was steered to identify and assess the extent of the local market share of illicit cigarettes and accurately estimate the tax revenue loss to the government. This independent study was based on material evidence collected from field surveys, in addition to key interviews and consumer surveys. According to the findings, it is estimated that 583 million illicit cigarettes have entered Sri Lanka in 2018, which amounts to 15.57 percent of the total tobacco market. The study also reveals that as a result, the Government of Sri Lanka incurred a staggering revenue loss of Rs. 17.98 Billion in 2018. Furthermore, the report points out that given the infrastructure and human resource constraints at law enforcement level, coupled with the potential extraordinary profits to be made and low penalties, there is considerable incentive for people to engage in the illegal trafficking of cigarettes. In addition to the massive revenue losses incurred, a booming illicit trade also undermines the Government’s Tobacco Control Policies. Furthermore, the study clarifies that the widely believed assumption that increasing taxes on legitimate cigarette will lower the smoking rates, can be misleading. The decline in legitimate cigarette sales is not an indication of a reduction in overall smoking, as in most cases, smokers may have switched to cheaper options and illicit cigarettes. This is further corroborated by evidence worldwide where tobacco tax hikes have led to booms in illicit trade, facilitated by organized criminal networks. Given the attractive incentives available from the illicit cigarette trade due to exorbitant profit margins, regulatory loopholes and easy transportability of products, the regulatory framework and the operating arms need to be further strengthened to control smuggling and trading activities related to cigarettes. The Report calls on policy makers to adopt several key measures, in line with the FCTC protocol of the WHO to curb this dangerous trend, including:
  • Enforcing the already existing criminal laws pertaining to the illicit cigarette trade;
  • Streamlining legislation to curb smuggling and local trading activities of illicit tobacco products through severe punishments and imposing rigorous investigation and criminal prosecutions;
  • Broadening the coverage of tobacco tax to include substitute products including beedi and cigars;
  • Improving infrastructure in customs investigations with state-of-the-art anti-smuggling equipment such as X-Ray scanners, endoscopes, mirrors, night vision equipment and advanced cameras; and
  • Building capacity of law enforcement institutions, including the Customs, Excise Department and Police to control smuggling and trading of illicit cigarettes.

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