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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2396

Hidden Truth

By Manjari Peiris

It is a well-known fact that taxation is one of the most effective and cost effective measures to reduce tobacco consumption, especially among the youth and the poor and raise government revenues for development programs.

The Sri Lankan President together with the Ministry of Health strongly support and play a major role in adopting new policies which are aligned with the WHO Framework Convention on Tobacco Control (FCTC) to reduce tobacco consumption.

During the Cabinet discussion on the measure proposed by the Ministry of Health (MOH) to ban sale of loose cigarettes held on 11 September 2018, the Ministry of Finance objected to the measure citing tobacco control measures caused the Government to lose approximately US$ 107 million.

Ironically, according to the data from the Ministry of Finance, the tax collected from tobacco increased from approximately US$ 155 million to US$ 600 million from 2015 and 2017, a significant and historic increase of 32 per cent.

According to the World Health Organization (WHO) and the World Bank, tobacco use is a net loss to any economy and recommends measures to reduce it.

Studies show that the loss to Sri Lanka due tobacco use in 2015 was significantly more than the tax collected. The MOH estimates that around 20,000 people die annually due to tobacco-caused diseases.

Meanwhile, pro tobacco media in Sri Lanka has often published reports biased to the monopoly producer Ceylon Tobacco Company (CTC).

I quote from Verité Research (VR) article published an Insight titled 'Who's responsible for 'Alternative Facts’ on tobacco taxation', 23 May 2018 in Daily Mirror.

The current Insight draws attention not to an inaccuracy but a key misunderstanding about cigarette prices that has been fostered in the media and hides the truth about who decides on the price of cigarettes and how those decisions have profited CTC.

Over the last decade or so, the net-of-tax price charged by CTC per cigarette stick, has grown faster than the tax charged by the government.

The media often presents the government policy to increase cigarette tax as a policy to increase cigarette price. Second, it presents the price increases as being driven exclusively by tax increases. Both claims are incorrect.

This claim that the government policies to increase cigarette tax is presented as a policy to increase cigarette price is incorrect since government has no legal powers to directly dictate the price of cigarettes– it only has the power to set the cigarette tax. After the government sets the tax, it is CTC that decides on the cigarette price.

The claim that price increases are driven exclusively by tax increases is also false. When the taxes per cigarette are increased by the government, CTC has three choices: (1) absorb some of the tax increase, so that the price increase is less than the tax increase; (2) pass on only the tax increase to the consumer and increase the price by only the amount of the tax increase and (3) increase price by more than the tax increase, so that the CTC plus wholesale and retail revenues per stick (known as the net-of-tax price) is also increased.

The third option that the CTC has consistently chosen is that the increase in price has not just been due to the tax increase, but also due to the net-of-tax price increase by CTC.

CTC schedules the increase of net-of-tax price to happen at the same time that the government increases taxes, public attention is diverted towards the tax increase and the price increase is seen as being fully driven by government tax increase, even while CTC has increased its profits, despite some contraction in demand due to the price increase. CTC's revenue from each cigarette sold has been growing faster than the revenue to the government.

It is also revealed that despite the public understanding to the contrary, the tax percentage of cigarettes has historically been decreasing, not increasing, since 2005. For the most-sold brand, the tax rate was 82.5 percent in early 2005 but was down to 67.9 percent by the first half 2016.

Despite the corrective tax changes in the third quarter of 2016, the tax rate is still only 74 percent of price at present, well below the ratio in 2005. These tax rate changes follow the same pattern for the least-priced-brand as well.

Veritae Research points out that for over a decade, CTC has been increasing the net-of-tax-price faster than the increase in government tax, further confirms that cigarettes in Sri Lanka are still significantly under taxed.

It says that the Finance Ministry has failed to increase cigarette taxes over the last 20 months (since November 2016), even in line with inflation, just as it failed to do so in the first 20 months after the 2015 January elections; until the President and Minister of Health intervened through the Cabinet to rectify the anomaly.

It is possible that the Finance Ministry is equally misled by the strong misunderstandings about cigarette prices and taxes that are prevalent in the media. But Sri Lanka would certainly do better with a Finance Ministry that paid more attention to professional analysis, rather than hearsay in the media, on its most important taxes.

- Asian Tribune -

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