CTC assesses biz viability as beedi, illicit fags gain large market share

Beedi and illicit fags have made considerable inroads to Sri Lanka’s tobacco market due to ad-hoc and irrationally excessive taxes slapped on the legally manufactured cigarettes, making it extremely difficult to generate meaningful value, said the country’s only legal manufacturer of cigarettes. 
According to Michael Koest, the Chief Executive Officer of Ceylon Tobacco Company PLC (CTC), the local unit of the multinational British American Tobacco, beedi has recorded an exponential growth during the last decade or so, gaining 44 percent of the total tobacco market compared to 20 percent in 2007.          
This trend, he said, would continue to increase because the affordability of legal cigarettes continues to diminish. As a result, he added, people would increasingly shift to low priced beedi causing billions of rupees of losses in tax revenue to the government.  
CTC estimates beedi to reach half the tobacco market soon. 
Successive governments have slapped the so called ‘sin industries’ with taxes whenever their coffers ran dry. The latest such action was the 28 percent increase in excise duty in October 2016 and the introduction of the 15 percent of value added tax (VAT) in November 2016. 
CTC said the dual impact of those measures caused their volumes to halve. Also the move cost the the government as much as Rs.13.2 billion in tax revenue during the fourth quarter alone. 

In 2016, the company manufactured 3.9 billion sticks. 
CTC contributed a whopping Rs.87.4 billion in excise taxes to government coffers in 2016, which amounted to 7 percent of the total government revenue.
“However, irrational policy decisions and unlawful enforcement of tobacco regulations in recent times will jeopardize our ability to create value and reinforce the need to take some tough decisions for our business by finding sustainable ways of operating in such a hostile environment.
Unfortunately, this means that the entire value injection into the Sri Lankan economy is at risk”, Koest said in his annual review.  
Meanwhile, the higher taxes and duties have also emboldened the smugglers of illicit cigarettes. The number of raids the Customs Department has carried out recently pertaining to illicit fags have also gone up significantly.  
CTC estimates that the illicit fags account for at least 8 percent of the total tobacco market in 2017 posing an enormous challenge to the legal cigarette industry.  While the top-line pressure is mounting, the company has also begun to feel the challenges in sourcing tobacco leaves due to unreasonable restrictions on cultivation and the unlawful enforcement of regulations through pressurizing farmers to abandon tobacco farming. 
“Emerging external challenges have compelled us to revisit our strategy and engage in decisive management interventions to ensure the viability of our business”, Koest said adding that portfolio growth is a key pillar in the company’s strategy which they function towards achieving in a more socially responsible manner.