Sri Lanka lost an estimated Rs 29.5 billion in potential tax revenue in 2025 because of illicit factory-made cigarette consumption, according to an economic assessment by Oxford Economics, which estimates that illegal products accounted for 20% of the market despite a substantial decline from the previous year’s estimated peak. The findings highlight the scale of tobacco-related revenue at stake for the government, as the country’s tax system continues to rely heavily on the legal cigarette industry and cheaper alternatives remain widely consumed.
The report, The Economic Impact of the Cigarette Industry in Sri Lanka, published in October 2026, was commissioned by Ceylon Tobacco Company PLC (CTC), the country’s sole legal cigarette manufacturer and supplier of legal factory-made cigarettes. It estimates that illicit cigarettes cost the government Rs 29.5 billion in foregone taxes during 2025, equivalent to 17% of the legal factory-made cigarette sector’s actual direct tax contribution. The assessment covers excise duty, value-added tax (VAT), the Social Security Contribution Levy (SSCL), corporate tax and labour-related income taxes that might otherwise have been collected.
Oxford Economics estimates that illicit factory-made cigarettes accounted for approximately 20% of total factory-made cigarette consumption in 2025, equivalent to around 470 million sticks. The estimate draws on research by PepperCube, an external consultancy, whose survey covered almost 11,500 male smokers aged 22–64 across Sri Lanka. Survey responses initially placed illicit products at 16% of factory-made cigarette consumption. After adjusting for likely under-reporting, including cases where respondents’ reported purchasing behaviour appeared inconsistent with prevailing market prices or their acknowledged previous use of illicit cigarettes, PepperCube estimated the share at 20%.
The estimated proportion represents a decline from a peak of 32% in 2024, when illicit cigarette volumes were estimated at up to 880 million sticks. The report cautions that the methodologies used for the two years were not directly comparable. It attributes the apparent reduction to higher prices for illicit cigarettes, a narrowing of their price advantage over legal products and increased reluctance among retailers to stock illegal cigarettes amid government enforcement efforts.
The legal cigarette market has also contracted considerably. CTC produced approximately 1.92 billion cigarettes for the domestic market in 2025, compared with legal consumption of 3.9 billion sticks in 2016. The report links this decline partly to the rising cost of legal cigarettes relative to general consumer prices. Between 2016 and 2025, the overall consumer price level increased by 140%, while prices rose by approximately 350% for tier-one cigarettes and 250% for tier-four products. Above-inflation increases in excise duty contributed to the higher prices.
The tax calculations take account of how smokers might respond if illicit cigarettes were no longer available. PepperCube’s findings suggested that some consumers would switch to legal cigarettes, while others would move to beedi or stop smoking. After adjusting for reported changes in consumption, Oxford Economics estimated that 303 million additional legal cigarettes would have been purchased in 2025 in the absence of illicit products. These would have included 134 million John Player Gold Leaf sticks, 147 million John Player Gold sticks and 23 million Capstan sticks.
The resulting estimated loss in sales taxes was Rs 24.6 billion, comprising Rs 18.6 billion in excise duty, Rs 5.4 billion in VAT and Rs 0.6 billion in SSCL. Lower sales would also have reduced income and profits in the legal sector, diminishing corporate and employee income tax receipts by an estimated Rs 4.9 billion. Together, these effects produce the report’s total estimated loss of Rs 29.5 billion.
The survey found that 11.5% of smokers consumed illicit cigarettes in 2025, although prevalence varied substantially by region. More than one-fifth of smokers used illicit products in several districts, with particularly high levels reported in Batticaloa, Puttalam and Ratnapura. Most illicit users were dual consumers who smoked both legal and illegal cigarettes rather than relying exclusively on illicit products. Purchases frequently occurred through informal networks of friends, neighbours and family members, while consumption generally took place in private settings rather than near the point of sale. Almost half of illicit smokers cited affordability as a reason for buying these products, and illicit users tended to smoke more cigarettes daily than those who bought only legal brands.
The report places these findings within a broader assessment of the legal cigarette industry’s economic and fiscal contribution. Oxford Economics estimates that the legal factory-made cigarette value chain generated Rs 74 billion in gross domestic product in 2025, equivalent to 0.2% of national GDP, and supported approximately 81,400 jobs, or 1% of national employment. The estimate includes direct activity in tobacco cultivation, manufacturing, distribution and retail, as well as additional economic activity generated through domestic suppliers and employees’ spending.
Of the employment total, approximately 14,600 jobs were associated with tobacco farmers and agricultural workers, 301 with CTC’s workforce, 1,100 with distribution companies and 62,700 with retail activity. CTC sourced tobacco leaf from 884 contracted farmers and 5,610 sub-growers, with nearly 15,000 farmers and farm workers involved in production during the year. The company’s cigarettes were distributed through 11 distribution companies to around 74,600 retail outlets.
The legal value chain generated an estimated Rs 181 billion in government tax revenue in 2025, equal to 3.6% of all government tax receipts. Excise duty alone contributed approximately Rs 112 billion. Taxes including excise duty, VAT, SSCL, tobacco tax, corporate tax and withholding tax on dividends represented 82% of the average retail price of factory-made cigarettes. Oxford Economics also estimated that cigarette-related sales taxes accounted for 2.7% of Sri Lanka’s total government tax and non-tax revenue, compared with a global median of 1.0%.
The report’s assessment does not consider the wider social and health impacts of tobacco consumption, whether legal or illicit. Its analysis instead focuses on the economic footprint of the legal factory-made cigarette industry, the scale of illicit consumption and the resulting implications for public revenue.
It also identifies hand-rolled beedi as a much larger tobacco market by volume. Beedi consumption was estimated at 6.5 billion sticks in 2025, accounting for 73% of all tobacco sticks consumed in the country, compared with 22% for legal factory-made cigarettes and 6% for illicit factory-made cigarettes. Beedi, made from tobacco wrapped in tendu tree leaf, remains substantially cheaper than duty-paid factory-made cigarettes. Retail prices were estimated at Rs 10–Rs 15 per stick, broadly less than half the price of many factory-made products and at little more than a third of the price of Capstan, the cheapest duty-paid factory-made cigarette.
A tobacco tax on beedi production was introduced in 2023 at Rs 2 per stick and increased to Rs 3 in April 2025. However, as of August 2026, beedi remained outside the excise duty system, and the report cites evidence of continued smuggling of beedi-related products. Oxford Economics argues that differences in taxation and compliance across tobacco products complicate revenue collection, alongside the losses associated with illicit factory-made cigarettes.
The report was produced using data supplied by CTC, national statistics and PepperCube’s market research. Oxford Economics states that its estimates rely on third-party information and that revisions to those data could affect the results. The document is confidential to Ceylon Tobacco Company PLC and may not be published or distributed without its prior written permission.
