Sri Lanka’s battle against NCDs: Is the Sugar-Beverage Tax doing enough?

Continued from yesterday

Priyanka
Jayawardena

Examining the timeline of SSB tax implementation in Sri Lanka reveals interesting insights. Initially set at 50 cents per gram (c/g) of sugar in 2017, the tax rate has changed, being subsequently reduced to 30 (c/g) per gram. This ad-hoc approach to adjusting tax rates has not accounted for inflation, potentially diluting the tax’s intended impact over time.

Is SSB Tax Effective in Sri Lanka?

Price elasticity of demand measures how responsive consumers are to changes in price. Thus, understanding the price elasticity of SSBs in Sri Lanka can help predict the impact of the tax. In the context of the SSB tax, the IPS study finds that soft and fruit drinks exhibit a high level of price sensitivity, indicating that consumers are more likely to change their consumption behaviour when prices change.

The study reveals that a 10% price increase is associated with a remarkable reduction in the quantity of soft drinks (32% drop) and fruit drinks (18% drop). This finding underscores the tangible impact of the SSB tax on consumption habits, aligning with the initial intent of the tax – i.e., to lower the consumption of these unhealthy beverages.

While the SSB tax’s positive effects are evident, a nuanced trend merits attention. The study highlights that the potential effect of the tax has somewhat diminished over time. For instance, in 2019, people did not respond as strongly to price changes when buying soft drinks compared to 2016. This implies that when the price of soft drinks increased, it did not affect people’s buying habits as much in 2019 as it did in 2016. This could be due to the prices of other products rising to a higher level or because people’s purchasing power had improved. Additionally, the price sensitivity of fruit drinks remained relatively stagnant between 2016 and 2019. This intriguing finding indicates that while the tax had a significant initial impact on consumption patterns, this impact might be gradually waning.

The critical factor contributing to this trend is the lack of adjustment of SSB tax rates to account for inflation. Unlike other excise taxes that adapt over time, the SSB tax rates in Sri Lanka have not been regularly updated in response to changing economic conditions. Instead, adjustments have been made on an ad-hoc basis. Sri Lanka’s recent bout of spiraling inflation would have further eroded the ‘real’ tax substantially.

Benefits of Effective SSB Taxation

The introduction of SSB taxes in Sri Lanka reflects a commitment to tackling the alarming rise of NCDs. However, the real impact of such taxes can be compromised by inflation and insufficient adjustments over time. For these policies to achieve their intended goals, it is imperative to implement tax rates that factor in economic changes and maintain their potency in discouraging SSB consumption.

By adopting a comprehensive and adaptive approach, Sri Lanka can significantly improve public health outcomes and curb the NCD burden.

Policymakers should consider a proactive and data-driven approach to achieve meaningful reductions in SSB consumption through effective SSB taxes. Regular reviews of the tax rate, aligned with inflation and income growth, can help ensure that the tax remains a potent tool for promoting healthier dietary choices and combatting NCDs.

Furthermore, imposing a tax on unhealthy products such as SSBs will support the government’s continuous efforts to generate revenue without increasing the costs of essential goods at a critical time for the economy.