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Two significant events impacted the beer industry during the 3rd quarter of this financial year albeit, negatively. The first was in the first week of October when the tax on mild beer was increased by 27% & that of strong beer by 32%. The second was in the third week of November when strong beer taxes were increased by a further 29%. A relatively small reduction in the tax on mild beer was announced in November but was quickly reversed within a few days. Thus taken together, within a period of two
months, the excise tax on strong beer was increased by 70% whilst that of mild beer was increased by 27%. These tax increases were ostensibly to increase Government revenue. If that was indeed the case, it has been an abject failure. Beer taxes, which stood at Rs 2.2 bn in September 2015 was down 18% to Rs 1.8 bn by December 2015, the first full month after the double tax increase on the industry. In the same month, when consumers first felt the full impact of the double tax increase, the Group
experienced a significant drop in both volumes & profits. Thus policy makers at the Finance Ministry have successfully deprived the Government of revenue and undermined corporate & shareholder value of a public quoted company with – literally - two strokes of the pen. But that is not all.
The volume lost by the beer industry has been picked up by the toddy & arrack sectors.
Toddy is thought of as a poor man’s drink which comes from coconut sap. It is certainly cheap since it is taxed at a mere Rs 30 per liter (strong beer which has approximately the same alcohol content attract a
tax of Rs 315 a liter whilst mild beer with a lower alcohol content is taxed at Rs 190 per liter). However, the extent of coconut sap in commercially available bottled toddy is anybody’s guess. Available information suggests that this so called toddy is made mostly of a chemical cocktail. To compound matters, most toddy industry players have a less than perfect reputation for meeting their tax obligations. Thus, the recent tax increase on beer has pushed a significant segment of consumers into a product that is – to put it mildly – unhygienic & into an industry that may not necessarily pay its taxes in full.
Arrack is the other sector that has gained from the beer industry’s loss. Whilst the excise tax on strong beer was increased by 70%, the tax increase on arrack was very significantly lower at 24%. Since beer is acknowledged as the least harmful alcoholic beverage, the wide disparity in the tax increase between the two products and the preferential treatment meted out to a beverage with a higher alcohol content is both unusual & defies rationality. Post the recent excise duty adjustments, Sri Lanka is in a unique position; in this country, the tax per ml of alcohol is inversely proportionate to the alcohol content in the beverage! Thus in per ml of alcohol terms, mild beer attracts a higher tax than strong beer which in turn attracts a higher tax than arrack. In this modern day and age this is a shocking policy anomaly. This is not a result of a lack of knowledge; on two occasions – first prior to September and thereafter in November
– policymakers at the Finance Ministry were briefed on global norms relating to the alcohol industry. On both occasions the Ministry was also briefed on the multiple concerns pertaining to the toddy industry.
However, a home spun solution has found favor and the Ministry’s message to consumers is clear; consume a beverage with a higher alcohol content. To make matters worse, some players in the arrack industry are perceived to walk a thin line in terms of their tax payments, much the same as with the toddy sector.
In summary, the recent excise duty amendments have led to greater consumption of products which are either unhygienic or of a higher alcohol content, has enhanced returns in two sectors where tax evasion is perceived to be widely prevalent, has reduced government revenue & has destroyed value in the beer sector. Thus in one fell swoop, consumer health, government revenue and industry profitability have all
A number of initiatives have been put in place to re-structure the Group to suit the current operating environment. Thus whilst the results of the final 3 months of the year – and excise tax payments – are expected to be significantly lower than in the previous quarters, an improvement on the December results have already been realized.
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