Improving Public Health in Sri Lanka through Enhanced Sugary Drinks Taxation

Taxing SSBs as a policy option

According to the 2019 Word Health Organization (WHO) estimates, diabetes is the second highest cause of death in Sri Lanka, accounting for 12,460 deaths. With increasing rates of obesity and diet-related NCDs, there is significant focus on reducing the daily sugar intake.

Taxing SSBs is a globally recommended evidence-based policy to improve food environments. Research identifies several reasons for SSB taxation, primarily due to their observed association with non-communicable diseases, high sugar content, and minimal nutritional value.

By increasing the cost of these beverages, policy makers aim to discourage their consumption, ultimately leading to better public health outcomes. Beyond the health benefits associated with reduced SSB consumption, SSB taxes also generate revenue. When the Government of Sri Lanka introduced this tax in 2017, it anticipated LKR 5 billion (more than $15 million) in revenue. 

The impact of SSB tax in Sri Lanka

The effectiveness of the SSB tax can be influenced by its structure and rate. Generally, higher tax rates are more effective in reducing consumption. In Sri Lanka, the SSB excise tax is specific, applied on sugar content per 100 ml, with the government aiming to deter consumption by imposing higher costs on these beverages.

However, an often-overlooked factor that can significantly impact the effectiveness of this tax is inflation. As the general price level of goods and services rises over time, the purchasing power of money decreases. This means that the same tax rate applied today might not have the same “real” value in the future due to the diminishing value of currency caused by inflation. On the other hand, as people’s average income per person rises over time, specific tax rates have less impact.

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 was subsequently reduced to 30 (c/g) per gram (Figure 1). This ad-hoc approach to adjusting tax rates has not accounted for inflation, potentially diluting the tax’s intended impact over time.

Figure 1: SSB Tax Rates, Inflation, and Per Capita GDP Growth Trends (2017-2022)

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Source: Constructed based on CBAR 2022.

Price elasticity of demand measures consumers’ responsiveness to changes in price. Understanding the price elasticity of sugar-sweetened beverages helps predict the impact of the tax. The IPS study finds that soft and fruit drinks exhibit high price sensitivity, indicating consumers are likely to change their consumption behavior when prices change.

The study reveals a remarkable impact of the SSB tax on consumption habits, with a 10% price increase associated with a 32% reduction in soft drinks and an 18% drop in fruit drinks. This underscores the tangible impact of the tax on lowering the consumption of these unhealthy beverages, aligning with its initial intent.

While the positive effects of the SSB tax are evident, its potential effect 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 (Figure 2). This suggests that the price increase did not significantly affect buying habits in 2019, possibly due to rising prices of other products or improved purchasing power. Additionally, the price sensitivity of fruit drinks remained relatively stagnant between 2016 and 2019, indicating a gradual waning of the tax’s initial impact.

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” value of the tax substantially.

Figure 2: How would a 10% price increase in sugary drinks affect consumption (2016 vs. 2019)?

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Source: Constructed based on HIES 2019 microdata.

The introduction of sugar-sweetened beverage taxes in Sri Lanka reflects a commitment to addressing the alarming rise of non-communicable diseases. However, the real impact of such taxes can be compromised by inflation and insufficient adjustments over time. To achieve their intended goals, it is imperative to implement tax rates that factor in economic changes.

Policy makers should take a proactive and data-driven approach. Regular reviews of the tax rate, aligned with inflation and income growth, can help ensure that the said tax remains a potent tool for promoting healthier dietary choices.

Furthermore, imposing a tax on unhealthy products like SSBs can support the government’s efforts to generate revenue without increasing the costs of essential goods during a critical time for the economy.

Institute of Policy Studies of Sri Lanka. 2022. Strengthening Fiscal Policies and Regulations to Promote Healthy Diets in Sri Lanka. Colombo.

World Health Organization (WHO). 2022. WHO Manual on Sugar-Sweetened Beverage Taxation Policies to Promote Healthy Diets. Geneva.

WHO. The Global Health Observatory.