World No Tobacco Day Raise Taxes on Tobacco. WORLD NO TOBACCO DAY 2014 May 31st

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1 World No Tobacco Day 2014 Raise Taxes on Tobacco WORLD NO TOBACCO DAY 2014 May 31st 1

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3 World No Tobacco Day Every year, World Health Organization (WHO) and its partners observe World No Tobacco Day (WNTD) on 31st of May highlighting the health risks associated with tobacco use and the need for strengthening effective policies to reduce tobacco consumption. An important area related to curbing the tobacco epidemic is chosen as the theme each year and in 2013 the WNTD was themed on banning tobacco advertising, promotion and sponsorship. This year the theme is Raise taxes on Tobacco. One major reason for global trends been developed for tobacco control is deaths due to tobacco exceed those due to motor vehicle accidents, suicides, homicide, AIDS, tuberculosis and maternal mortality combined. The severity of the tobacco problem can be outlined as follows. The backdrop of tobacco problem The global tobacco epidemic kills nearly 6 million people each year, of which more than 600,000 are non-smokers dying due to second-hand smoking. 20,000 people die due to tobacco related diseases in Sri Lanka. Unless we act immediately, the epidemic will kill more than 8 million people every year by More than 80% of these preventable deaths will be among people living in low- and middle-income countries. It is responsible for 1 in 10 adult deaths. Among the 5 greatest risk factors for mortality, it is the single most preventable cause of death. 11 % of deaths from ischemic heart diseases are attributable to the world s leading killer, tobacco use. More than 70% of deaths from lung, trachea and bronchus cancers are attributable to tobacco use. The economic costs of tobacco use are equally devastating. In addition to the high public health costs of treating tobacco-related diseases, tobacco users are also less productive due to increased sickness, and those who die prematurely deprive their families of much-needed income. Given the context of tobacco problem, the industry formulates diverse range of mechanisms to mask the problem of tobacco and to block the prevention activities. Some of these tactics include bribing politicians and policy makers, giving scholarships to academics and producing false research, questioning scientific facts to create confusion.

4 2 World No Tobacco Day 2014 WHO Framework Convention on Tobacco Control and the partnership of Sri Lanka The WHO Framework Convention on Tobacco Control (WHO FCTC) is an evidence-based treaty, developed in response to the globalization of the tobacco epidemic that reaffirms the right of all people to the highest standard of health. The WHO FCTC opened for signature on 16 June in Geneva is now closed for signature, has 168 Signatories, including the European Community, which makes it one of the most widely embraced treaties in UN history. Sri Lanka signed the FCTC treaty on 23rd September 2003 and ratified on 11th of November Sri Lanka was the first in Asia and the fourth in the world to ratify the FCTC treaty. As measures related to reduction of demand for tobacco, FCTC introduce Article 6: Price and tax measures to reduce the demand for tobacco. Article 6: Price and tax measures to reduce the demand for tobacco 1. The Parties recognize that price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons. 2. Without prejudice to the sovereign right of the Parties to determine and establish their taxation policies, each Party should take account of its national health objectives concerning tobacco control and adopt or maintain, as appropriate, measures which may include: (a) implementing tax policies and, where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption; and (b) prohibiting or restricting, as appropriate, sales to and/or importations by international travelers of tax- and duty-free tobacco products. 3. The Parties shall provide rates of taxation for tobacco products and trends in tobacco consumption in their periodic reports to the Conference of the Parties, in accordance with Article 21.

5 World No Tobacco Day Tobacco taxation in Sri Lanka It should be noted that the situation in Sri Lanka is different from many other countries in that cigarette production is a private sector monopoly industry and the Government of Sri Lanka sets both the price and the tax. However the government does not have a systematic method to formulate the level of taxation and pricing. The government also faces further complications in determining prices and taxes when faced with brand proliferation strategies used by the tobacco monopoly in the introduction of new products. When examine the tobacco tax during last few years it is evident that the tobacco corporation has attained a high degree of influence on the Government tax on tobacco. Tax Paid to the Government in Rs. Millions Year Total Govt Tax Income Tobacco Tax Percentages ,392 19, % ,840 19, % ,839 20, % ,597 20, % ,552 23, % ,828 26, % ,378 30, % ,947 31, % ,621 37, % ,933 37, % ,747 40, % ,611 49, % Source: Central Bank of Sri Lanka Annual reports 2000 to 2011 While there is an absolute increase in tobacco tax revenues in the 8 year period in question there is also a significant percentage decrease in tobacco taxation. The absolute increase may be as a result of high rates of inflation prevalent in the country at the time. When considering the increase in the percentage of tobacco tax from 2006 to 2007, it is around 11% while the inflation in 2007 was 15.8%. This highlights the fact that the tax increase is lower than the inflation rate. The graph shows the percentage of tax in retail price. It can be observed that there is no consistency of tax rates between the various lengths of cigarettes (Variance between cigarettes below 60mm such as Capstan Plain, and cigarettes between 72-84mm such as JPGL in 2011). However the effective tax composition recommended by the WHO FCTC is an excise tax of 70-80% of the retail price. (Source: Verite Research, 2014) It is important to evaluate the success of past taxation strategies with regard to revenue concerns, the burden of tobacco related disease and goals with regards to consumption levels and to develop a rational methodology of setting the prices and taxation in response to the dynamic data and policy goals.

6 4 World No Tobacco Day 2014 Why raise tax on cigarettes? There is evidence to support the view that increases in tobacco taxes are directly linked to decreases in the prevalence of tobacco use and the decrease in the initiation of usage of tobacco. The U.S. Surgeon General s Report, Reducing Tobacco Use, found that raising tobacco-product prices decreases the prevalence of tobacco use, particularly among kids and young adults, and that tobacco tax increases produce substantial longterm improvements in health. From its review of existing research, the report concluded that raising tobacco taxes is one of the most effective tobacco prevention and control strategies. The report, Taking Action to Reduce Tobacco Use of the National Academy of Sciences Institute of Medicine concluded that the single most direct and reliable method for reducing consumption is to increase the price of tobacco products, thus encouraging the cessation and reducing the level of initiation of tobacco use. People in the lower expenditure quintiles are clearly much more price-responsive to price changes; a 10% real price rise would cause total consumption (combining the effects of prevalence and smoking intensity) to fall by around 6% for lower income groups, and 3% for higher income groups. Simulations of the likely effects of price increases on consumption and tax revenues showed that large real price increases (at least 50%) are needed for a perceptible effect on prevalence rates. But price increases have a much stronger effect on the cigarette demand, especially in poorer households. The poorest households spent an average of just over 3% of total expenditure on tobacco products. A 10% price rise would cause a very small increase in the proportion of expenditure allocated to tobacco, but larger price rises would cause it to fall. By reducing smoking levels, cigarette tax increases reduce secondhand smoke exposure among nonsmokers, especially children and pregnant women. Wall Street tobacco industry analysts have long recognized the powerful role increased cigarette taxes and rising cigarette prices play in reducing U.S. smoking levels. For example, a December 1998 Sensitivity Analysis on Cigarette Price Elasticity by Credit Suisse First Boston Corporation settled on a conservative estimate that cigarette consumption will decline by four percent for every 10 percent increase in price. Every 10% increase in the real price of cigarettes reduces overall cigarette consumption by approximately 3%-5%, reduces the number of young-adult smokers by 3.5 %, and reduces the number of kids who smoke by 6%-7%.

7 World No Tobacco Day Evidence from USA

8 6 World No Tobacco Day 2014 Tax gains through a rational consistent taxation policy The JPGL (Gold Leaf), which has the largest market share of cigarettes (over 80%), is currently priced at Rs.28. If the prices were adjusted to maintain affordability, i.e. in keeping with Gross Domestic Product (GDP) per capita, the price should ideally be Rs by If a estimated growth rate of 7% of GDP, as expected by the Asian Development Bank, in 2014 it should be priced at Rs (Source: Verite Research, 2014) The table demonstrate the tax revenue if excise taxes were consistent. If a standard 60% of excise duty on retail price was used for all cigarette categories, the government would have gained over 8 billion rupees than the collected tax revenue. If the prices had increased to maintain affordability and was consistent in changing price between all categories, the government would have increased its excise tax revenue over 115%. (Source: Verite Research, 2014) Every year, more than Rs. 8 billion of tax revenue is forgone due to under pricing cigarettes as a result of an inconsistent taxation mechanism.

9 World No Tobacco Day Cigarette is the only product which kills one out of two consumers. The world has accepted that tobacco is dreadful given the health, economic and social harm caused without any disagreement and the world is lined up to support tobacco control. This was clearly witnessed in the recent experience in implementing pictorial health warnings on cigarette packaging in Sri Lanka. Extraordinary level of support was received for this measure from professionals, policy makers, policy implementers, media, academics and general public irrespective whether they are adults or youth, men or women or even smokers or nonsmokers. Whenever a government raise taxes on any product, there is an opposition built as public has to bare the increased cost. However, with respect to a killer product like tobacco, majority including the smokers accept increased taxes as it encourage smokers to quit, and it minimize the damage caused. Most importantly, it might be the only tax increase a government could impose that would attract negligible amount of displeasure from the public. World trend is to take control measures and/or minimize the damage in the event it is not practical or realistic to extinct occurrence of a problem. For example to minimize the pollution caused by vehicles, controls on emissions of vehicles are imposed. Similarly to curb the tobacco plague, demand control measures are introduced in the world when the supply cannot be brought to a halt. Increasing price through raising taxation, discouraging initiation through implementation of pictorial health warning are some of the demand reduction methods widely accepted and implemented in the world. Another positive side of raising taxes is that, it would imply more revenue from a multinational company rather than from a local company. As Ceylon Tobacco Company (CTC) is owned by British American Tobacco (BAT) in terms of owning more than 92% of shares, the profits of the company are shipped back to empires like UK and USA. Therefore, increasing tax on cigarettes manufactured in a multinational would not affect the local revenue collected in the mode of taxes A tobacco industry argument is that raising taxes on legal tobacco products like cigarettes provoke usage of illicit cigarettes. However there is no scientific data to prove that there is a correlation between increasing taxes on tobacco and increase in illicit tobacco market. If you want to contribute to the wellbeing of public, then the best opportunity is in supporting tobacco control as tobacco kills people in their middle age, the most economically productive phase in life.

10 Alcohol and Drug Information Centre No.40/18, Park Road, Colombo 05, Sri Lanka. Tel: , , Fax: Web site:

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