Cigarette Tax Indexation, Getting It Right and Getting It Wrong

Abstract

The article tackles the cigarette tax indexation policy introduced with Sri Lanka’s 2019 Budget: where annual increases to the cigarette excise tax (a tax exclusive to cigarettes) will be based on inflation and income growth. This is commendable, as the policy (1) prevents cigarettes from becoming more affordable over time and (2) ensures regularity in cigarette tax and thereby price increases. However, the implementation is flawed. First, the cheapest cigarettes in the market are not subject to a tax increase under the new policy. Second, the under-taxing of shorter, cheaper cigarettes relative to the longer, premium cigarettes is not addressed.