Business
Why the Government Should Increase Tobacco Taxation in the Forthcoming Budget
A Win-Win Strategy:
by Harini Weerasekera
The COVID-19 pandemic has left many economies struggling to revive economic activity and boost growth. Economic stimulus packages of varying sizes, shapes and forms have been disbursed by governments around the world to keep their economies afloat. What this means is that governments of developing countries in particular, face extremely tough fiscal policy choices; in some cases, compelled to spend money that they do not necessarily have.
Sri Lanka is no exception to this. COVID-19 has pushed what was already a high spend-low revenue economy into further fiscal turmoil. IPS has stressed that getting the country’s fiscal house in order is the need of the hour, in order to effectively respond to the pandemic, on top of dealing with an already mounting debt burden.
When government finances are tight, policy solutions that can be leveraged to boost government revenue without threatening growth and which support additional pandemic-related spending in the coming years, are essential. Increasing tobacco taxation is an excellent example.
IPS Study on Tobacco Taxation
A recent study by IPS projects that government tax revenue can be boosted by LKR 37 billion by 2023, if taxes on cigarettes are streamlined and raised in line with inflation. Although the government assumed a policy stance of cutting taxes across the board when they came into power, excise taxation of sin-goods such as cigarettes is one area where it is still politically feasible to raise taxes in order to boost much needed revenue. For example, back in 2019, the government increased excise taxes on tobacco to offset an overall reduction in VAT rates on goods.
This month’s budget is therefore an opportune moment to increase tobacco taxation, which will simultaneously help raise revenue at a critical time for the country, and generate significant and positive health benefits that would flow from reducing smoking.
Why Cigarette Taxation?
Although tax rates on some types of cigarettes in Sri Lanka have been raised in recent years, the most-sold brand of cigarettes in the country remains affordable according to the World Health Organization (WHO) affordability index. Further, the tax structure for cigarettes is not streamlined, and tax policy changes have been implemented in an ad-hoc manner. What this means is that there is further space to reduce cigarette affordability by using appropriate tax policy. This will ease health costs to the government from tobacco related-illness which can then be redirected towards pandemic related health costs, whilst also securing additional tax revenue in these difficult times.
In order to do this, IPS recommends in our latest study, that the government and related institutions deploy an incremental approach to revising cigarette taxes over the next four years (2020-2023). Sri Lanka currently has a five-tier tax structure for cigarettes based on cigarette length, some of which remain affordable and accessible to the young and poor in particular. Adopting a uniform excise tax system that is periodically adjusted for changes in inflation, in line with the WHO Framework Convention for Tobacco Control (FCTC) protocol, will reduce overall affordability of all types of cigarettes.
Implementing these recommendations will result in Sri Lanka’s government revenue from cigarettes increasing by Rs 37 billion by 2023; cigarette consumption reducing from one billion sticks by 2023; and prevention of 140,000 premature deaths from cigarette consumption in the future.
Additionally, a forthcoming study by IPS finds that the net effect of tobacco control policies on national income is positive, as a result of consumers switching their spending from tobacco products to other goods and services.
A Link between Tobacco Taxation and Illicit Trade?
While industry lobbyists, the world over, are resistant to cigarette tax increases, and argue that increased taxes promote illicit tobacco trade and beedi consumption – the evidence shows otherwise. According to WHO FCTC Knowledge Hub research, there is a negative correlation between illicit trade share and cigarette prices, globally (Figure 1). Instead, it is the existence of informal trade channels, easily crossed borders, weak governance, ineffective customs/tax administration, corruption and complicity of producers/importers, among other reasons, that cause large-scale illicit trade of tobacco. Hence, illicit trade should be controlled through organizational changes in tax administration such as more investigations, more tax and customs officers, and technology, rather than by keeping cigarette taxes/prices low.
Similarly, there is concern that beedi consumption has risen due to tax increases on cigarettes. However, the Alcohol and Drug Information Centre (ADIC) trend surveys over the years have found that there is no pattern of switching from cigarettes to beedi in response to cigarette price increases. However, authorities should consider taxing beedis too; avoiding tax increases on cigarettes, on the other hand, will not aid in reducing consumption of either cigarettes or beedis.
Moreover, controlling the consumption of various tobacco products needs to be tackled using different strategies, as outlined by internationally recognized sources such as the WHO.
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SLT-Mobitel, the nation’s ICT and Telecommunications Service Provider recently partnered with Spotify, to mark their launch in Sri Lanka. Spotify is a paid premium music streaming app which allows subscribers to listen to music to their hearts content. Both, SLT-Mobitel Post-Paid and Pre-Paid customers will now be able to enjoy Spotify by activating a monthly recurring subscription or one-time subscription plan and access unlimited music streaming and downloading facilities.
The subscription charges will get added to the user’s customary billing, where payment will be deducted in real time. Starting from the payment date, the user will be able to access Spotify and download their favourite songs, for the next 30 days. Users who sign up for their first monthly subscription will receive an additional one month, courtesy of Spotify. The one-month subscription plan is not applicable with one-time subscription plans. SLT-Mobitel data rates, depending on the user’s respective broadband charges, will apply.
Spotify also has some exciting features that will provide SLT-Mobitel customers with the opportunity to listen to ad-free music, access millions of uninterrupted music under one platform, play any song they like, anywhere they go, and also be able to enjoy their music offline.
SLT-Mobitel customers can select their preferred premium package under four categories; Individual, Duo, Family, Student. Each category has recurring and non-recurring plans. After one month of free streaming, the package will activate once the offer period terminates. While both, the Individual and Student premiums are limited to one account user, the Duo package offers two accounts and the Family premium is accessible through six accounts. To view Spotify plans, users can log on to https://spoti.fi/3aLWvce
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by Sanath Nanayakkare
Anyone conversant with the elements of a political economy would know that Sri Lanka is using its ‘sovereign power’ to manage the different dynamics of the economy in a sustainable manner, Professor W. D Lakshman Governor of the Central Bank said on Wednesday.
“Some critics are saying that we adopt a so-called modern monetary theory. That’s not the case. In fact, Sri Lanka is using its sovereign power in a number of economic aspects to honour its external debt repayment commitments as well as to reduce its debt burden in the medium term as well as achieve resilient growth in the medium to long term, he said.
“We make policy decisions to boost our gross foreign reserves, meet our external debt servicing, to facilitate monetary expansion, to boost our GDP growth, to strengthen our current account balance and manage our domestic and external economic variables in a sustainable manner. This is not a modern monetary theory. This is an age-old tool used by central banks around the world when the circumstances demand it, he said.
“Certain trade-offs will be necessary when dealing with an economy which has a big fiscal gap to bridge. There are efforts to push Sri Lanka towards the IMF again which would in turn have influence on our policymaking. We have taken policy measures to stabilize the economy and we have adequate reserve levels to meet our debt repayments. Meanwhile, we are in negotiations with overseas central banks and multilateral agencies to further boost our reserve level and it would materialise within a matter of weeks,” he noted.
“One of the tools the Central Bank has introduced is in respect of repatriation of export proceeds into Sri Lanka and conversion of such proceeds into Sri Lankan rupees in order to strengthen the foreign exchange situation of the country,” he said.
The Governor made these remarks while delivering the keynote speech at a webinar organised by the Veemansa Initiative led by its Managing Director Luxman Siriwardene – the former Executive Director of Pathfinder Foundation.
The webinar revolved round the topic ‘External debt situation in Sri Lanka: Are we heading for a resolution or crisis?’
Professor Sirimal Abeyratne, Prof. Sumanasiri Liyanage, Dr. Nishan de Mel and Dr. Ravi Liyanage were the other speakers on the panel.
Author
By Hiran H.Senewiratne
CSE produced signs of a rebound yesterday with both indices closing positive, though turnover remained low. Central Bank Governor W.D Lakshman’s recent statement on managing foreign reserves gave some boost to the market yesterday, stock market analysts said.
The index experienced a zigzag movement within the early hours of trading; thereafter, it recorded a slight up-trend as it reached its intraday high of 7,439. Later, the market witnessed a down-trend at mid-day, followed by a sideways movement and closed at 7,372, gaining 43 points during the month of February, market sources said.
It is said the banking sector dominated turnover with a contribution of considerable parcel trades in Sampath Bank, Commercial Bank and HNB.
Further, the Commercial Bank’s impressive quarterly results during the recent turbulent period also built investor confidence. Commercial Bank was able to register a18 percent net interest income when other banks were reporting a decline. Its share price increased by Rs. 3 or 3.5 percent. On the previous day, its shares started trading at Rs. 85 and at the end of the day they moved up to Rs. 88. Due to the positive growth results, the bank announced a Rs. 4.40 dividend per share, plus a Rs. 2 script divergent for every share.
Further, Sampath Bank shares also appreciated in both crossing and retail. In crossings its shares appreciated by Rs. 1.At the end of the day they moved up to Rs. 154.50. In the retail market, its shares moved up by Rs. 2 or 1.3 percent. Previously, its shares fetched Rs. 154 and at the end of yesterday they moved up to Rs. 156.
Amid those developments, both indices moved upwards. The All Share Price Index went up by 104.48 points and S and P SL20 rose by 67.78 points. Turnover stood at Rs. 3 billion with four crossings. Those crossings were reported in Sampath Bank, where 3.9 million shares crossed for Rs. 602.2 million, its share price being Rs. 154.50, HNB 375,000 shares crossed for Rs. 39.4 million, its shares traded at Rs. 105, Pan Asia Power 9.5 million shares crossed for Rs. 33.2 million, its shares traded at Rs. 3.50 and Access Engineering 1.2 million shares crossed for Rs. 28.2 million; its shares traded at Rs. 24.
In the retail market top five companies that mainly contributed to the turnover were, Expolanka Rs. 450 million (10 million shares traded), JKH Rs. 205 million (1.3 million shares traded), Browns Investments Rs. 199 million (34.9 million shares traded), Sampath Bank Rs. 191 million (1.2 million shares traded) and Dipped Products Rs. 137.7 million (2.8 million shares traded). During the day 101 million share volumes changed hands in 18046 transactions.
During the day, Expolanka, the biggest contributor to the turnover, saw its share price appreciating by Rs. 6.20 or 15 percent. Its share price quoted on the previous day was Rs. 41 and at the end of trading yesterday it moved up to Rs. 47.
Sri Lanka’s rupee quoted wider at 193.50/195.50 levels to the US dollar in the spot next market on Thursday while bond yields remained unchanged, dealers said. The rupee last closed in the spot market at 194.50/195.00 to the dollar on Wednesday.
