Legal cigarette market contracts by 19% amid surge in demand for illicit alternatives

In 2023, Sri Lanka witnessed a significant 19 percent yearon-year (YOY) decrease in legal cigarette consumption, representing less than a quarter of the combustible tobacco market share.

This decline is attributed to substantial tax increases, which have spurred a surge in demand for illicit cigarettes and less regulated beedi, as reported by Ceylon Tobacco Company (CTC).

The market share of legal cigarettes fell to 24 percent from 2022’s 30 percent. At the same time, the consumption of untaxed illicit cigarette sticks rose by 67 percent YOY, accounting for a 9 percent market share.

“Escalating taxes and the ensuing sharp increases in the price of legal cigarettes, has given rise to a surge in the illicit trade. Low levels of infrastructure currently available for enforcement and insufficient penalties also continue to exacerbate the problem,” CTC Chairman Suresh Shah told the company’s shareholders in the latest annual report.

The loss to state coffers, due to illicit cigarettes, was estimated at Rs.79 billion in 2023, according to a research cited by CTC.

Meanwhile, undertaxed beedi consumption saw an increase of 10 percent, accounting for 67 percent of the market share.

Shah pointed out that the market share for legal cigarettes also continues to erode, with the growing price differential between cigarettes and beedi.

Although Rs.2 Tobacco Tax per beedi stick was implemented from January 1, 2022, CTC noted a collection mechanism is required to implement this initiative. Smuggled tendu leaves recorded a 100 percent increase in 2023, resulting in the beedi industry becoming more lucrative.

“The market share for legal cigarettes continues to erode, with the growing price differential between cigarettes and beedi. Notably, since the beedi industry is both underregulated and undertaxed, the government is deprived of a significant inflow of tax revenue. The demand for beedi has also led to a spike in smuggled tendu leaf imports,” Shah elaborated.

Although beedi accounts for nearly 67 percent of the market in terms of volume, it only contributes Rs.3-4 billion to state coffers, compared to the Rs.160.6 billion contributed by the legal cigarettes.

“Given the significant loss of government tax revenue, due to the sharp growth in illicit and underregulated beedi, we urge the government to support the long-term viability of the legal cigarette industry, by ensuring moderate and proportionate tax increases for the industry,” CTC Managing Director and CEO Monisha Abraham urged.