How a market shift ate into tax revenue

Abstract

How the shift from longer to shorter cigarettes ate into Sri Lanka’s tax revenue

Sri Lanka taxes cigarettes by length—shorter sticks face lower taxes.

Between 2018 and 2024, the market shifted towards these cheaper, shorter cigarettes. As a result, their market share rose by over 50 percentage points, while market share for longer cigarettes declined.

The outcome: the weighted average tax per stick fell by LKR 21.9, leading to a LKR 40.9 billion loss in government revenue for the sticks sold in 2024.