Exposing ‘Alternative Facts’ on Tobacco Taxation

This post is based on Verite Research’s Insight Who’s responsible for ‘Alternative Facts’ on Tobacco Taxation published in Mirror Business in June 2017.

Background

Ceylon Tobacco Company PLC (CTC) has several arguments against tobacco tax increase. (Please refer to the TobaccoUnmasked page Industry Responses to Tobacco Tax Increase in 2016 for more details). Verite Research’s article critically analysed three such ‘Alternative Facts’ - “‘blatant falsehoods’ spread to the media by those in power who purposely create doubt about even obvious and easily verifiable facts”:

• ’Alternative Fact’ 1 – cigarette tax increase will reduce the government tax revenue
• ’Alternative Fact’ 2 – users would switch to beedi because of the high price of cigarettes
• ’Alternative Fact’ 3 – tax increase would cause CTC to drastically reduce its production

’Alternative Fact’ 1 – Government Tax Revenue will be Reduced

In the year 2016, media reported that government lost 10 billion of tax revenue due to the tax increase. (See Industry Responses to Tobacco Tax Increase in 2016 for more details). Verite Research disputes this claim with evidence, as described below:

Image 1: Verite Research comparison of estimated and actual excise tax revenues in 2015 and 2016.

Excise Tax Revenue Increased in 2016

According to Central Bank data, excise tax revenue (without considering the gain by Value Added Tax), reported an increase of LKR 8.7 billion (Image 1). Verite Research explained the above scenario using basic principles of economy and research evidence. When a product’s price increases, consumers reduce buying it. However, according to the research findings on cigarettes, the percentage of decrease of buying is lower than the percentage of increase of price. For an example, if the price is increased by 20%, the buying is reduced by a percentage less than 20. Thus, the gain from a tax increase is higher than the loss, leading to an increased tax revenue to the government.

Tax Revenue Would not Reduce in 2017

Ceylon Tobacco increased the price of cigarettes more than the tax increase. The most sold brand’s price was increased by LKR 17.00 when the tax increase was LKR 13.25 and the cheapest brand’s price was increased by LKR 10.00 when the tax increase was LKR 7.31. According to Verite Research, if the government tax revenue to reduce in 2017:

• cigarette sales in Sri Lanka should fall below 2.5 billion sticks in the year 2017 or
• a very high number of smokers should shift from the commonest brand to the cheapest brand

Verite Research gave evidence in their Insight against both occurrences, dismissing the claim of a probable government tax revenue reduction in 2017.

’Alternative Fact’ 2 – Smokers Would Switch to Beedi

Ceylon Tobacco from time-to-time had brought on the ‘Increase in Beedi use’ argument against raising cigarette tax (Please see the page Industry Arguments: Increase of Beedi Consumption for more details). Verite Research disputed this claim as detailed below, and warned the government to be cautious about the lower-priced cigarette brands instead; as the cigarette users’ logical choice would be to shift to those (which is half the price of the premium brand) rather than to beedi. Thus, they recommend to reduce the price/tax gap of the two cigarette types (by increasing the tax on the lower priced cigarettes), as per the World Health Organization (WHO) recommendation.

Image 2: Verite Research’s comparison on cigarette and beedi trends in Sri Lanka for the past 25 years

Beedi Use Shows a Downward Trend

Tendu Leaf is the special paper imported to Sri Lanka that is used to roll in the tobacco in beedi production. Verite Research compared the trends of beedi and cigarette production as shown in Image 2 based on the Tendu Leaf import data. The estimated beedi production showed a fluctuating downward trend.

Image 3: Excerpt from the [CTC Annual Report 2015 quoting the CTC/CEO’s claim on beedi smokers migrating to cigarettes]]

Media Claims not Supported by Data

According to the Verite Research insight, none of the media articles that made the claim contained supportive data or reference to information sources. (Also see The Island Newspaper Misquoting TobaccoUnmasked)

CTC Annual Report 2015 Contradicted its own Claim

Verite Research highlighted a contradicting statement made by the CTC Chief Executive Officer (CEO) in its Annual Report 2015 - “It was therefore encouraging to observe the increasing demand for our premium brands and the migration of beedi consumers to our brands, during the year” (Image 3) - stating that it is more compatible with the research findings than the claims in public media.

’Alternative Fact’ 3 – Caused CTC to Drastically Reduce its Production

Several newspapers reported CTC claiming a high production loss leading to closure of leaf depots and employee lay-offs. Please see the page Industry Arguments: Impact on Livelihoods for more details.

Verite Research Insight criticised media for not verifying the easily verifiable facts before publishing the above claim. The verifications made are described below.

CTC Production Remained High

According to Verite Research analysis (Image 4), CTC production in 2016 (3.78 billion sticks) reduced by less than 5% compared to 2015 (3.96 billion), it remained higher than the 2014 (3.62 billion) production.

Image 4: Verite Research comparison of cigarette production and CTC earnings for the years 2014, 2015 and 2016

CTC’s Income and Profits Increased in 2016

CTC increased the price of cigarettes more than the tax increase in all analysed years leading to a steady increase in its income and profits (Image 4). According to Verite Research, this behaviour and outcome disputes the propagated claim of CTC “being the victim” and suggests the availability of “plenty of room for even further price increases”.

CTC’s Income will Increase in 2017

Based on the price increase made by CTC in addition to the tax increase, Verite Research predicted that CTC will have a higher income compared to 2015, even if cigarette sales drop by 1 billion sticks compared to 2016.

TobaccoUnmasked Resources

Other relevant TobaccoUnmasked entries:

• Industry Responses to Tobacco Tax Increase in 2016
• Industry Arguments: Impact on Livelihoods
• Industry Arguments: Increase of Beedi Consumption
• The Island Newspaper Misquoting TobaccoUnmasked