Sri Lanka: Tobacco Tax in the Clutches of Bureaucracy

Source from:  The Nation  07/29/2014

The research titled 'Parliament should have a formula for regulating cigarettes' conducted by Verité Research is a comprehensive academic analysis of the tobacco tax system in Sri Lanka and the consequent losses of revenue for the government.

On a more cynical note it seems that Ceylon Tobacco Company (CTC) runs on a government subsidy. For example, from each one rupee rise in price for Gold Leaf, the government gets 60 cents and CTC 40.

Profits of Ceylon Tobacco Company, the sole authorized corporation to sell tobacco based products in Sri Lanka, increase while the consumption is decreased. It is said that the government currently losses Rs, 56 billion each year because Gold Leaf is not sold at the price it should be sold.

According to the Verité research, 'The current provisional estimates are that the special excise tax on cigarettes would have brought about 58 billion rupees in revenue to the government in 2013. This is around five percent of the government revenue, making it an important variable to manage.'
The study indicates that the tax price setting system is ad hoc and in the clutches of political and bureaucratic discretion. It also suggests that cigarette price should keep step with per capita GDP growth.

The tobacco industry is a stakeholder of the national development drive and also among the few largest contributors to the GDP. However the global tobacco epidemic kills nearly six million people every year, of which more than 600,000 are non-smokers dying due to second-hand smoking. According to a statement issued by the Alcohol and Drug Information Centre, approximately 65 people die per day in Sri Lanka. Demand reduction approaches, specially raising taxes on tobacco are considered the most effective policy to reduce tobacco use.

"Tobacco    tax adjustments    should be based on a rational formula, especially since multinational companies are involved," said ADIC Executive Director Pubudu Sumanasekera. "Sri Lanka has no such transparent formula." He explained that, for example, if a two rupee increase in cigarette price is announced, only one rupee and 25 cents go into government coffers. "The rest goes to the industry. But the general public and even media for that matter automatically assumes that the increase is a tax of two rupees. This is because the process is not transparent." He pointed out that the lack of transparency could lead to bribery of officials by the industry. As the Verite research exemplifies the percentage of excise tax in retail price fluctuates.

"This is why the parliament has to intervene," emphasized Sumanasekera. He explained that the tax formula should be made by someone who is familiar with the field or else it would be unduly beneficial to the industry. "The formula should be published to maintain transparency. There should also be a dialogue between all stakeholders and the public."

When asked why the government has failed to introduce a comprehensive formula thus far, Sumanasekera said that one of the reasons is the lack of expertise. "There are no experts in Sri Lanka with the know-how to create such a formula."

Sumanasekera pointed out that the lack of knowledge of how the tax is enforced and what percentages went to the government and the tobacco industry have prevented media and public from demanding that such a formula be enforced. "Sri Lanka has never had any policy that the parliament should get involved in tobacco tax matters. This should change," reiterated Sumanasekera. He pointed out that encouraging more research such as the one done by Verite Research is the first step in changing the dimensions of the tobacco tax.

"The first such research published four years ago was completely ignored by the Treasury," revealed Sumanasekera. "We are not insinuating corruption on the  part of Treasury officials, for which we have no real evidence. But we must insist that the parliament get involved to ensure transparency."

Sumanasekera reiterated that the Treasury has neither denied the implications of the study nor have they taken steps to adjust the tobacco tax. "Which," he went on to say, "Is somewhat dubious." When asked whether a 100 percent tax could be levied from any retail price increase, Sumanasekera said that this could be done. "But the Treasury hasn't shown any interest."

The cost of manufacture of one cigarette is one rupee. The bulk of the retail price goes to the industry, resulting in billions being lost to the government. "It's like gifting British American Tobacco billions of rupees."

"Ceylon Tobacco Company is a myth," said Sumanasekera. "CTC has little to do with Sri Lanka." Sumanasekera went on to says that 92 percent CTC stock is owned by British American Tobacco (BAT). "The name itself misleads people. It's the same everywhere. Eighty percent of PTC or Pakistan Tobacco Company is owned by BAT. CTC public relations are such that they can use to their advantage top politicians of whatever political party that comes into power."

When asked whether CTC can be acquired by the government, Sumanasekera said that he is unfamiliar with legal complications of such a takeover. "If a certain political party announces such a taken over in their manifesto before they come into power, it maybe possible."

Sumanasekera said some countries have in place free trade laws that allow their governments to own no less than 51 percent of any foreign business venture in the country and said that Sri Lankan legislature could look into such options.

When asked why tobacco consumption cannot be banned altogether considering the grave health hazards it poses, Sumanasekera explained that the stronghold multinational companies have over the political system prevents this from being imposed. "These multinational companies have strong ties with even leftist political parties. The only country in the world where tobacco is banned is Bhutan."

When asked whether class action cases can be filed to claim punitive and compensatory damages in order to demoralize the tobacco industry, Sumanasekera said that this is one option ADIC is looking into now. "We are in the process of promoting such litigation. However there are obstacles. This is a new territory for most local attorneys and they are still unfamiliar with foreign cases."

He explained local attorneys can be given incentive to take up such cases by introducing a system in which a percentage of damages claimed can be added to their legal fees. "This is currently illegal in Sri Lanka."

Treasury Secretary Dr. P B Jayasundera was not available for comment while Deputy Minister of Finance and Planning, Dr. Sarath Amunugama refused to comment, citing meetings. Enditem