Alcohol and tobacco taxes not a cow that can be eternally milked: Jafferjee

19 December 2022 03:41 am - 9 - {{hitsCtrl.values.hits}}

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Highlights need for scientific approach focusing on revenue elasticity when deciding taxes on alcohol and tobacco

By Nishel Fernando

The government must take a scientific approach focusing on revenue elasticity when deciding taxes on alcohol and tobacco to collect an optimal tax revenue as they are not “a cow that can be eternally milked,” an expert opined.
“Although, alcohol and tobacco are prone to be inelastic, there are substitutes. Beedi is a substitute, and beedi has three times the volume of sticks of legal tobacco. There are substitutes for legal alcohol. You have illegal alcohol and home-brewed illicit alcohol. This is not a cow that can be eternally milked,” JB Securities Limited CEO and Advocata Institute Chairman Murtaza Jafferjee said.

He made these remarks delivering the 24th Annual Tax Oration of CA Sri Lanka in Colombo last week.
Jafferjee pointed out that tax revenue from alcohol and tobacco has become static amid high taxation as consumers shift towards cheaper alternatives.

“Over a period of time, there has been a significant reduction in stick volumes. The other problem you have with cigarettes is that there are 1.6 million daily smokers. It’s a certain class of people who smoke. So you are putting an enormous amount of burden on that to account 6-7 percent of government revenue. In terms of liquor, there has been growth, but the growth is quite slow,” he added.
Given the declining tax revenue on cigarettes and static tax revenue on alcohol, he noted that it cannot be considered entirely elastic due to leakages. Hence, he argued that the government should take a scientific approach when taxing alcohol and tobacco.

“At policy level, there are those who say we should index the taxes. I don’t agree with that. If this is what happens, what’s the point? It’s not totally elastic. In Sri Lanka’purchasing power parity (PPP) context, we have one of the most expensive cigarettes in the world. On a US$ basis, we are more expensive even than Japan. So, we have to be very scientific in our policy, we can’t be emotional saying we can’t cut cigarettes tax, because smokers will smoke,” Jafferjee said.

Cigarette and alcohol taxation should not be simply indexed to inflation. Careful consideration should be given to revenue elasticity in deciding the optimal taxation,” he elaborated.
Further, he pointed out that 40 percent corporate income tax imposed on sin industries is often passed on to consumers given the monopoly power.

Moreover, he pointed out that illegal liquor is thriving in isolated areas as there are no licensed outlets, which has resulted in a loss of revenue to the government. Hence, he proposed the government to liberalise the licensing of outlets which would be a beneficial policy in improving the availability of legal liquor and thereby increase revenue collections.

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Comments - 9

haris Wijayasiri Monday, 19 December 2022 08:29 AM

Key to these taxes is reliable statistics on social damage caused and medical expenditure related to them. The ideal is to stop smoking and stop excessive consumption of alcohol. The cost of property damage and loss of life and limb related to the consumption of alcohol is very high. Recreational and illegal drugs also get in to this category. The issues related need to be evaluated by Sociologists, Medical professionals, and economists have very little say in it. Public welfare is the issue. Taxation is supposed to be a deter rant, but this is not a cash-cow!

Jude Monday, 19 December 2022 08:47 AM

Successive governments didn't have any plans to increase GDP substantially or even marginally!! Yeah!!

Jude Monday, 19 December 2022 08:53 AM

Government only way to increase revenue by taxing alcohol and cigarettes!! Then go begging for grants and loans from international agencies and countries to bridge the mammoth budget deficit!!

Jude Monday, 19 December 2022 08:59 AM

For sta SL Must reduced the number of MPs to 100 or less!! Then SL government will save over one Trillion rupees, once this done government don't have to borrow money from anyone!! And remember, scrap PC's and LG council members,, yeah that's right!!

Daya Monday, 19 December 2022 09:05 AM

Fantastic analysis and points. The hundred million question to the government is, is there anyone in the government who can think out of the box? The answer is none, so Paradise Island continues to suffer.

sacre blieu Monday, 19 December 2022 09:38 AM

well said Mr. Jafferjee. However sound and intelligent advice with our politicians is like pouring water on a ducks back. Among these legislators and even our political representatives there has been an abuse of power and position with many of them involved in base activates in addition to illegal holding of illicit wealth. Still no conclusive action on the illicit Ethanol fraud.

Seqi Monday, 19 December 2022 10:06 AM

Why tax so heavily the few remaining pleasure of the working men and women?

DOT Monday, 19 December 2022 03:43 PM

You are right . The stone age was ended, not becourse No-Stone!

Jef Tuesday, 20 December 2022 01:17 PM

No cigarettes no alcohol still people keep dying if you abuse anything from food and beverage end results ...No point penalizing the things that people enjoy the hard working daily income earners middle class are the ones are effected with increase in price government must be realistic majority in sri lanka a poor they are the ones who contribute the most to the countries economy and the work force other methods should be used to tax the high income earners and business the basic things that poor consumes should be given a priority or consestion in very dificult times today due to high local produce with unrealistic uncontrollable prices countries economy have been effected government must take priority and responsibility to stimulate the economy for a recovery in every possible way its only the people of this nation can help rebuild the nation fast if not things will get worsened day by day due to poor consumer confidence...

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Alcohol and tobacco taxes not a cow that can be eternally milked: Jafferjee

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