Sri Lanka tax policy that promotes hard alcohol use is ‘shocking’: beer maker

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Sri Lanka’s largest beer maker who has seen sales fall as taxes on soft alcohol were raised in quick succession late last year says the current tax policy which is making hard alcohol more attractive to consumers is ‘shocking’.

The firm said in October tax on mild beer (lower alcohol content) was raised by 27 percent and strong beer by 32 percent. In November taxes on strong beer was raised by another 29 percent.

Though a reduction in tax on mild beer was announced in November it was quickly reversed again taking the total tax increase up to 70 percent.

While excise tax on strong beer was raised 70 percent, tax on arrack, Sri Lanka’s most popular hard alcohol was up only 24 percent.

Tax policy that encourages hard liquor is “unusual and defies rationality” Lion Brewery told shareholders.

“…Sri Lanka is in a unique position; in this country, the tax per millilitre of alcohol is inversely proportionate to the alcohol content in the beverage,” Lion Brewery

“In this modern day and age this is a shocking policy anomaly”.

Lion Beer said its sales fell after the double tax hikes. It said the gap had been picked up by hard alcohol.

Industry analysts estimate legal hard alcohol sales have increased over 10 percent last year. Hard alcohol sales were also helped by a crackdown on tax unpaid bottles produced by some distilleries connected to members of the ousted Rajapaksa regime.

At one time Sri Lanka had high taxes on beer, which the beer firms said contributed to the abuse of alcohol and moonshine in Sri Lanka. Beer was not popularly consumed by low income earners.

After taxes were rationalised there was an increase in beer consumption. Even construction workers who used to slug a quarter bottle of arrack moved to cans of strong beer.

Anecdotal evidence seem to suggest a reversal of the trend though no data from a scientific study is available.

But Lion Brewery (Ceylon) Plc said revenues fell 4 percent to 8.2 billion rupees in the December 2015 quarter, from a year earlier. After tax profits fell 17 percent to 461 million rupees.

Tax collections on beer which was 2.2 billion rupees in September had fallen to 1.8 billion by December, the firm said.

When taxes are raised on good with elastic demand total tax revenues will fall.

If demand is relatively inelastic and tax hike will reduce the quantity demanded, but not total revenue.

Cigarettes which is strongly addictive and has no close substitutes except ‘beedi’ a cottage industry product, has a relatively inelastic demand.

Sharply falling sales as well as taxes seem to suggest the ready availability of close substitutes or reduced levels of addiction, or both economic analysts say.

Lion Brewery says in addition to hard alcohol, the toddy industry, a fermented domestic drink, supposedly made from coconut sap, also benefited from higher demand.

Toddy is taxed at 30 rupees a litre compared to strong beer at 315 litre.

“Available information suggests that this so called toddy is made mostly of a
chemical cocktail,” the firm said.

“To compound matters, most toddy industry players have a less than perfect reputation for meeting their tax obligations.”