• Illegal cigarette smuggling expanding despite increasing detections by Customs, Police
• Black market costs Govt. billions in lost tax revenue
• Smugglers undercut legal prices by avoiding taxes, tariffs, regulations
• Health experts warn cheap tobacco products could drive higher smoking rates
• Tackling crisis requires both tighter border controls and policy reforms, analysts say

In the shadow of Sri Lanka’s busy ports and bustling markets, driven by a volatile mix of steep excise tax hikes and inflation that has squeezed consumer wallets, a surge in the influx of illicit cigarettes has created its own black market.

While legal sales decline, low-cost brands of contraband – frequently smuggled through maritime routes, hidden inside industrial cargo containers, or smuggled by airline passengers – are flooding the streets. 

The physical reality of this black market is starkly exposed at the borders, where Sri Lanka Customs continues to intercept massive hauls, including multi-million rupee seizures at local freight yards.

For policymakers fighting to rescue the national economy, this sharp rise in smuggling is no longer just a border control issue; it is a critical drain on vital public revenue that threatens both economic recovery and public health.

When contacted by The Sunday Morning, Police Spokesman ASP F.U. Wootler said that there had been a notable increase in illicit cigarettes this year. “Most of the detection is being done by Customs at the airport, and according to observations, there is an increase. All these arrivals have been handled and detections are being carried out accordingly,” he said.

According to the Police, approximately 542,614 illicit cigarettes, along with 21 smugglers, have been taken into Police custody in collaboration with Customs from 1 January to date.

Speaking to The Sunday Morning, Sri Lanka Customs Director and Media Spokesman Chandana Punchihewa noted that over 1,853 cartons, more than 40 packs, and nearly 250,000 sticks of illicit cigarettes of several different foreign brands had been confiscated by Customs as of Friday (17). Several e-cigarettes have also been apprehended.

Economic impact

To understand the mechanics of this crisis, The Sunday Morning spoke to University of Peradeniya (UOP) Department of Economics and Statistics Professor Ananda Jayawickreme, unpacking how smuggling loops distort the economy, corrupt local institutions, and threaten public health.

Many casual observers label the trade of smuggled cigarettes as a classic black market phenomenon. However, Prof. Jayawickreme noted that from an economic perspective, this classification was not entirely true. 

“We can’t say it’s a black market, because in a black market, producers sell their products at higher prices than the regulated price. However, in this case, they are bringing these items from outside and selling them to the customer without paying taxes or any other charges.”

He explained that it functioned as a highly organised and completely illegal undercutting mechanism. Although smugglers incur the standard production costs in foreign manufacturing hubs, they aggressively bypass the State’s financial checkpoints. “They are jumping over taxes or tariffs, jumping over insurance; they are basically smuggling, making it a kind of an illegal market. A black market is not always illegal, but this is, of course, an illegal market.”

The most immediate casualty of this thriving illegal market is the Treasury, which relies heavily on tobacco excise taxes to fund public services. The direct loss of income severely damages public finance, while simultaneously tilting the playing field against legitimate businesses. Legal channels of obtaining cigarettes are regulated, with high excise taxes, adherence to price controls, and generally lower profit margins. They must also comply with strict quality standards. 

In contrast, illicit or contraband cigarettes bypass taxes and tariffs, enabling sellers to undercut market prices while profit margins remain high. Quality is also not guaranteed, as such channels allow for unknown and unhazardous tracking.

According to Prof. Jayawickreme, this tax evasion creates a toxic environment for law-abiding importers. “The Government will lose some amount of income from the excise tax. Thus, it has a direct impact on tax revenue and also affects the normal market because those who follow regulations and produce or import by paying due taxes face a lower profit margin than that of smugglers.”

This imbalance has filtered down to neighbourhood retail stores, where shopkeepers are quietly offering dual inventories to consumers looking to save money. “Illicit cigarettes can be sold at slightly lower prices, allowing sellers to undercut the market and capture a larger share of consumers. Retailers may also stock cigarettes supplied through legitimate channels as well as those obtained through illegal means,” he said.

Sri Lanka’s strategic location makes it a prime target for maritime smuggling networks. Its vast coastline and proximity to regional neighbours offer countless blind spots for enforcement agencies. “In Sri Lanka, this kind of situation is quite common due to the country’s proximity to India and other countries,” Prof. Jayawickreme explained. “It depends on how easily goods can be smuggled into the country, perhaps through the airport or harbours.”

Historically, smuggling routes across the Palk Strait have been heavily weaponised. During the civil war, the Liberation Tigers of Tamil Eelam (LTTE) aggressively capitalised on this shadow trade to bankroll its operations. Yet, even with modern State controls and high-profile seizures by Customs, the flow of contraband remains relentless.  

According to the Ceylon Tobacco Company (CTC), smuggled trade undermines tobacco control policies implemented by the Government and results in substantial losses in Government revenue. It further notes that while funding transnational criminal activities, smuggled cigarette earnings have been linked to funding narcotics, weapons, terrorist organisations, and human and sex trafficking.

According to the CTC’s Annual Report for 2025, Sri Lanka’s combustible market in 2025 was estimated to be approximately 8.9 billion sticks. Of this, the legal cigarette market was estimated to account for 22% while the beedi and illicit (smuggled cigarettes) markets were estimated to account for 72% and 6% of the market, respectively, in 2025.

It further estimates that, in 2025, 0.5 billion cigarettes were smuggled into the country, costing the Government a maximum of Rs. 51 billion in revenue.

Cost of cigarette tax leakage

As recommended by the World Health Organization (WHO), the minimum tax share on the retail price of cigarettes is 75%. In 2018, Sri Lanka’s tax share stood at 74%, right at that benchmark.

According to the Alcohol and Drug Information Centre (ADIC), the majority of cigarette taxation in Sri Lanka comes from an excise tax set as a fixed rupee amount per pack, which the Government adjusts only sporadically. The excise tax has been increased occasionally, but by far less than the company raised prices to increase its profits. While the tax increased in nominal terms and was duly reported  as a ‘tax hike,’ the tax share of the price kept falling.

However, in recent years, Sri Lanka has seen this share decline to 67%. According to ADIC, this tax gap is leaking State revenue every second. While taxes on most goods increased following Sri Lanka’s economic crisis, cigarettes quietly experienced a tax cut.

Since January 2025, when the tax share fell to 67%, the resulting tax revenue leakage has exceeded Rs. 30 billion and continues to grow. Out of this amount, more than Rs. 10 billion has reportedly been lost since 1 January to date.

As illustrated by the dashboard developed in collaboration with Public Finance.lk and Verité Research, that revenue leakage amounts to approximately Rs. 547 every second. It notes that if the Government had charged cigarette taxes in accordance with the WHO’s benchmark, nearly Rs. 18 billion would have been collected in 2026, with the revenue accumulating continuously. 

Health risks

Beyond the massive economic toll, the proliferation of cheap, untaxed cigarettes effectively poses a threat to Sri Lanka’s public health objectives. Higher taxes are designed to make smoking prohibitively expensive, driving down consumption rates. When cheap alternatives flood the market, that strategy falls apart.

At a media briefing hosted by the Health Promotion Bureau on Wednesday (15), National Cancer Control Programme (NCCP) Director Dr. Senaka Talagala noted that oral cancer was the most commonly reported cancer among males in Sri Lanka. He added that this was a condition that could be identified early and completely prevented.

Also speaking at the briefing, NCCP Community Dentist Specialist Dr. Prasanna Jayasekara said that the latest available data from 2022 identified 3,800 cases of oral cancer, of which 3,000 were among males and 800 among females. He said: “The WHO has found 28 carcinogens in tobacco, while areca nuts contain more than four types of carcinogens.”

Dr. Jayasekara noted that, in recent decades, processed tobacco and areca nut products known as mawa, babul, and thul had emerged, with these ‘betel packets’ gaining popularity among schoolchildren.

Prof. Jayawickreme explained: “The Government seeks to control the cigarette market because it is concerned about public health and aims to limit the importation of cigarettes, which cannot be done effectively when illicit cigarettes enter the market. As a result, tax revenue decreases, quality standards cannot be maintained, and there is no certainty about the type or quality of cigarettes, which is ultimately harmful to public health.”

Alarmingly, the low price barrier attracts low-income demographics and youth, guaranteeing a future crisis for Sri Lanka’s public healthcare system. “Ultimately, this will affect public finance because low-end cigarettes are not good for health, and the presence of illicit cigarettes may lead to increased consumption,” Prof. Jayawickreme warned. 

Table

Increases to be gazetted to cigarette excise taxes to plug revenue leak

Length

Current tax

Revised tax

Increase in tax

Up to 60 mm

Rs. 19.35

Rs. 22.90

+ Rs. 3.55

60–67 mm

Rs. 50.15

Rs. 60.11

+ Rs. 9.96

67–72 mm

Rs. 71.45

Rs. 77.28

+ Rs. 5.83

72–84 mm

Rs. 81

Rs. 91.59

+ Rs. 10.59

Note: All figures are tax per cigarette

(Source: Public Finance.lk)