Tobacco Tax in Sri Lanka

Summary

• Tobacco taxation is widely recognised worldwide as the single most effective measure, in a jurisdiction, for reducing tobacco consumption and its associated health burden.
• Tobacco taxation in Sri Lanka is a multi-layered system consisting of excise tax, tobacco tax, Value Added Tax (VAT), Nation Building Tax (NBT), and several import duties at different stages of production, importation, and consumption.
• The Ministry of Finance is the main policy-making authority, while implementation is shared among the Excise Department of Sri Lanka, Sri Lanka Customs, and Inland Revenue Department.

Background

Importance of tobacco tax

Tobacco use is the leading cause of preventable deaths globally, responsible for approximately eight million deaths each year. It imposes a significant burden on public health systems and contributes to a wide range of non-communicable diseases. Tobacco taxation is widely recognised worldwide as the single most effective measure, in a jurisdiction, for reducing tobacco consumption and its associated health burden.Please refer FCTC Article 6: Price and Tax Measures to Reduce the Demand of Tobacco page for more details.

Raising tobacco taxes is SMART.

• Saves lives
• Mobilises resources
• Addresses health inequities
• Reduces health system burdens and costs
• Targets noncommunicable risk factors for the achievement of Sustainable Development Goals (SDGs)

The MPOWER measures are intended to support country-level implementation of the Framework Convention on Tobacco Control (FCTC). These measures are essentially six evidence-based tobacco control strategies designed to reduce smoking prevalence and combat the tobacco epidemic. Raising tobacco taxes is one of these measures. Please refer Framework Convention on Tobacco Control (FCTC) page for more details.

Higher tobacco prices, achieved through higher taxes, deter initiation among potential users, reduce consumption among current users, and prevent relapse among former smokers. Price increases are particularly effective among children and youth, who are more responsive to changes in tobacco costs.

The World Health Organization recommends implementing simple tobacco tax structures with regular increases to keep pace with inflation and income growth. It emphasises applying equivalent taxes across all tobacco products to prevent substitution to cheaper alternatives and strengthening tax administration to reduce evasion and avoidance.

Tobacco Tax Framework in Sri Lanka

• Tobacco Tax Act, No. 8 of 1999 - first major fiscal measure targeting tobacco control in Sri Lanka.
• Framework Convention on Tobacco Control (FCTC) – Sri Lanka ratified on 11 November 2003, being the first in Asia and fourth in the world.
• National Authority on Tobacco and Alcohol (NATA) Act - the main comprehensive tobacco control law in Sri Lanka. It comprehensively provides for measures regulating smoking in public places, restricting advertising, promotion and sponsorship as well as pictorial and health warnings covering 80% of cigarettes packages. There are also regulations prohibiting manufacture, importation, and sale of smokeless tobacco products, e-cigarettes containing tobacco, and flavoured, coloured, or sweetened cigarettes.

Process of taxing tobacco

The process of taxing tobacco in Sri Lanka is a structured multi-stage system involving policy formulation, tax imposition, tax collection, and enforcement by multiple government authorities. Mainly guided by the Ministry of Finance, Excise Department of Sri Lanka, Sri Lanka Customs, and the Inland Revenue Department are involved in tobacco taxation in Sri Lanka. Table 1: The process of tobacco taxation in Sri Lanka

Step of the taxing process	Description
1. Policy Formulation	Lead authority – Ministry of Finance, Sri Lanka with approval from the Parliament The Ministry determines tax rates (Excise, VAT, import duties) and announces these changes in the annual budget
2. Tax Imposition	Local products Excise Department of Sri Lanka imposes excise duty on locally manufactured cigarettes, calculates tax based on quantity and supervises production and ensures correct tax application Inland Revenue Department imposes VAT and other taxes on tobacco (according to the VAT Act and related tax laws) Imports Sri Lanka Customs is responsible for applying taxes including VAT, and other levies on imported tobacco. Taxes are imposed at the point of entry (ports/ airports)
3.Tax Collection	Excise Department of Sri Lanka - collects excise duty from manufacturers Sri Lanka Customs - collects import-related taxes * Inland Revenue Department - collects VAT and other taxes

Different types of tobacco tax in Sri Lanka

Table 2: Different types of tobacco tax in Sri Lanka

Tobacco Tax Type	Description
Excise (Special Provision) Tax	Imposed specifically on tobacco products such as cigarettes, cigars, and other manufactured tobacco goods Charged, levied, and collected primarily as a specific tax based on quantity (e.g., per cigarette stick or unit of tobacco), and applied at the point of production or importation before products enter the market Administered primarily by the Excise Department of Sri Lanka for domestically produced tobacco, and by Sri Lanka Customs for imported tobacco products Operating within the legal framework of the Excise Ordinance
Tobacco tax	Targets manufactured tobacco products, including cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco *Charged, levied, and collected on each unit of produced tobacco product at the point of removal from the factory Collection of tobacco tax is primarily carried out by the Excise Department of Sri Lanka Imposed under the Tobacco Tax Act No. 8 of 1999
Value Added Tax (VAT)	Imposed on the tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco Consumption based tax - charged at each stage of the supply chain as a percentage of the value added, but the total tax is ultimately passed on to the final consumer through the retail price *Administration and collection of VAT on tobacco are primarily carried out by the Inland Revenue Department (IRD) Governed by the Value Added Tax Act No. 14 of 2002
Nation Building Tax (NBT)	Imposed on the tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco Calculated as a percentage of turnover or value of supply, but the total tax is ultimately passed on to the final consumer through the retail price Administration and collection of NBT were carried out by the Inland Revenue Department (IRD) Sri Lanka Governed by Nation Building Tax Act No. 9 of 2009 NBT was abolished with effect from 1 December 2019, no longer charged or collected in Sri Lanka
Income Tax For Imports	Targets importers, distributors, and companies engaged in the commercial import and resale of tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco Charged as a percentage of taxable profits (net income) earned from tobacco importation activities, rather than on the physical quantity of tobacco products Collected by the Inland Revenue Department (IRD) based on annual income tax returns submitted by registered importers and businesses involved in tobacco trade Imposed under the Inland Revenue Act No. 24 of 2017
Custom Duties For Imports	Targeting imported tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco entering the Sri Lankan market Charged based on the customs valuation of the goods (usually, CIF value = Cost+ Insurance+ Freight value) and applied at the point of import clearance before goods are released from the port Collected primarily by Sri Lanka Customs at border entry points during customs clearance procedures Imposed under the Customs Ordinance
Port and Airport Development Levy (PAL)	Targets imported tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco Charged as a percentage of the customs value (CIF value) at the point of importation, prior to the release of goods into the domestic market Collected by Sri Lanka Customs during the customs clearance process Imposed under the Finance Act No. 11 of 2002
Cess (Export Development Board Levy)	Targets imported tobacco products such as cigarettes, cigars, beedies, cigarette substitutes, and pipe tobacco Tax applied either as a percentage of the product’s import value (CIF value) or as a fixed amount per unit, depending on the type of tobacco product (HS code) Collected at the point of import clearance by Sri Lanka Customs Imposed under the Sri Lanka Export Development Act No. 40 of 1979

Tobacco Unmasked Resources

• Framework Convention on Tobacco Control (FCTC)
• FCTC Article 6: Price and Tax Measures to Reduce the Demand of Tobacco
• National Authority on Tobacco and Alcohol (NATA) Act
• Excise Department of Sri Lanka
• Sri Lanka Customs

The local language translations