Sri Lanka could be foregoing an estimated Rs. 17.3 billion in annual revenue in 2026 due to a decline in the effective tax share on cigarettes, despite sweeping tax increases across nearly all other goods and services since 2021, according to an analysis of fiscal trends.
In an article-style assessment prepared for Daily FT, Verité Research Founder Executive Director Dr. Nishan de Mel and researcher Raj Rajakulendran highlight that while the Government increased taxes on salaries, corporate profits, electricity, fuel, food, and essential household goods under its IMF-backed fiscal consolidation programme, cigarette taxation moved in the opposite direction.
The analysis notes that between 2021 and 2026, the tax share in the retail price of cigarettes declined significantly from levels closer to the World Health Organization’s recommended benchmark of 75% in 2018 to about 66.8% by 2026. This shift, it argues, reflects a failure to adjust specific excise taxes in line with rising industry retail prices.
“As cigarette prices increased due to industry pricing, the rupee-based excise duty did not rise proportionately, resulting in a falling tax share despite nominal tax adjustments,” the assessment explains.
The authors argue that restoring the tax share to the WHO-recommended 75% level would require no new legislation and no additional burden on households beyond existing price structures. Instead, it would primarily adjust the fiscal take from the tobacco sector, capturing revenue that is currently accruing as private profit.
They further estimate that closing this gap would generate Rs. 17.3 billion annually, equivalent to over one-time Sri Lanka’s allocation to disaster management and more than the cost of several key social welfare programmes, including nutrition and maternity support initiatives.
The analysis also challenges common industry arguments that higher tobacco taxes reduce overall revenue or increase illicit trade, citing international evidence and multilateral guidance from institutions such as the World Health Organization and the International Monetary Fund, both of which support regular increases in tobacco taxation for fiscal and public health reasons.
Sri Lanka, which ratified the WHO Framework Convention on Tobacco Control in 2003, is obligated under its guidelines to periodically adjust tobacco taxes in line with inflation and income growth, the authors note.
Concluding their assessment, the researchers argue that while the Government has made broad-based fiscal adjustments across the economy, the continued decline in the effective tax burden on cigarettes represents a policy inconsistency that could be corrected immediately, yielding significant revenue gains without additional strain on essential goods or households.
