Tobacco Industry Tactics to Evade Tax in Sri Lanka: Stockpiling Cigarettes

Summary

• Stockpiling is over manufacturing and over-supplying cigarettes to the distribution network before an anticipated tax hike, which is a tactic of the tobacco industry.
• D S Gunasekara Ltd, a distributor for Ceylon Tobacco Company PLC (CTC) obtained a loan of Rs. 3,150 million from the Katuwana branch of the Bank of Ceylon (BOC) to stockpile additional cigarettes before the upcoming budget proposals in November 2020.

Background

Stockpiling/ forestalling/ frontloading is over manufacturing and over-supplying cigarettes to the distribution network before an anticipated tax hike or budget proposal. In Sri Lanka, the excise tax on cigarettes is paid at the time of releasing the product for sale, not at the point of sale. In such a context, stockpiling of cigarettes allows the industry to sell a stock of cigarettes at a higher taxed price after having paid a lower tax. This tactic of the industry maximises the profit margins.

Research published in 2014, as a part of the International Tobacco Control Policy Evaluation (ITC) Project revealed that the tobacco companies have reduced ‘their tax liability by stockpiling and repositioning their products’. This is one of the many tactics the tobacco industry uses to evade tax around the world. You can read more on our page Tobacco Industry Tactics to Evade Tax.

D S Gunasekara Ltd Stockpiling Cigarettes

D S Gunasekara Ltd is a leading passenger transport company in Sri Lanka and a distributor for Ceylon Tobacco Company PLC (CTC) reportedly over 60 years. Ceylon Tobacco Company PLC (CTC), which holds the monopoly of cigarette manufacturing and sales in Sri Lanka, is a subsidiary of British American Tobacco (BAT).

Image 1: D S Gunaskera Ltd featured as a Distributor for the Ceylon Tobacco Company PLC (CTC) in the 2013 Annual Report.

In December 2020, D S Gunasekara Ltd was reported to have obtained a loan of Rs. 3,150 million (Rs. 3.15 billion) from the Katuwana branch of the Bank of Ceylon (BOC). Bank of Ceylon (BOC) is owned by the Government of Sri Lanka, and it is the largest commercial bank network in the country. This issue was first revealed by ‘Newshub.lk’ on 8 December 2020. Newhub.lk reported that this loan was approved in September 2020 to stockpile additional cigarettes in order to take advantage of a potential tax increase from the upcoming budget proposals in November 2020. It further reported that the company intended to purchase 5,400 boxes of Gold Leaf cigarettes, each containing 10,000 cigarettes and 160 boxes of Dunhill cigarettes. According to the web report, the net profit intended to be earned by D.S. Gunasekara was LKR. 7,697 million. John Player Gold Leaf and Dunhill are the most purchased cigarette brands in Sri Lanka, manufactured and traded by the Ceylon Tobacco Company PLC (CTC). The two brands are different types of cigarettes and include flavoured cigarettes as well, which are prohibited for sale in Sri Lanka.

Several national television channels and newspapers reported this issue, highlighting the tax evasion attempt of the company and the involvement of the state bank. Neither the D S Gunasekara Ltd nor the Ceylon Tobacco Company PLC (CTC) publicly responded regarding this allegation.

To read more details on the issue, please visit our page on Bank of Ceylon and the Cigarette Stockpiling Issue.

Implication

The Article 6 of the Framework Convention on Tobacco Control (FCTC) recommends raising tobacco taxes as the most effective and cost-effective strategy for reducing tobacco use and to combat the global tobacco epidemic. In addition, effective taxation leads to a reduction in direct and indirect costs and negative consequences of tobacco use, which is beneficial for the governments.

FCTC Article 5.3 recommends that the state institutions and their representatives to minimise interactions with the tobacco industry to avoid possible conflicts of interest. The interaction between the Bank of Ceylon (BOC) and the tobacco industry, as described in the post, violates Article 5.3 of FCTC. This tactic of the CTC reduces the government tax revenue, and the CTC get the undue advantage from that. Further, the industry takes advantage of the decrease in sales after the tax increase, claiming that the tax increase led to an increase in illicit trade and the loss of government revenue.

TobaccoUnmasked Resources

• Bank of Ceylon (BOC)
• D S Gunasekara Ltd
• FCTC Article 6: Price and Tax Measures to Reduce the Demand of Tobacco
• FCTC Article 5.3
• Tobacco Industry Tactics to Evade Tax
• Ceylon Tobacco Company PLC (CTC)
• British American Tobacco (BAT)

The local language translations