Higher taxes on beer promote hard liquor; deprive govt. of revenue: beer maker

• Tax increase on beer results in revenue from beer taxes falling 
• Says tax increase undermines corporate and shareholder values of a listed firm
• Volume lost by beer industry picked up by toddy and arrack sectors 

The policymakers at the country’s Finance Ministry are pushing the public towards consuming hard liquor, some of which may be illegally manufactured, the country’s largest beer producer Lion Brewery Ceylon PLC (Lion) warned.

“A homespun solution has found favour and the ministry’s message to consumers is clear; consume a beverage with higher alcohol content,” a note attached to the Lion third quarter interim financials said. 

The company said the government’s decision to increase the taxes on mild beer by 27 percent and strong beer by 70 percent to increase tax collection had backfired. 

“If that was indeed the case, it has been an abject failure. Beer taxes, which stood at Rs.2.2 billion in September 2015, was down 18 percent to Rs.1.8 billion by December 2015, the first full month after the double tax increase on the industry,” Lion said.

The tax increase might also have been appealing to some of the key political leaders and a section of Buddhist clergy who want the country to be alcohol free. Lion said that through the downturn in beer, the policymakers at the Finance Ministry had successfully deprived the government not only of revenue but also undermined corporate and shareholder values of a public company.

“But that is not all. The volume lost by the beer industry has been picked up by the toddy and arrack sectors... 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,” Lion said. When the taxes were increased, Mirror Business reported that the exact effect being felt now would occur and that the people would also be pushed to even riskier moonshine.

“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,” Lion said. It said that toddy, which is prepared unhygenically, was taxed at Rs.30 per litre, while strong beer, which has the same alcohol content, was taxed at Rs.315 per litre, while mild beer with a lower alcohol content was taxed at Rs.190 per litre.

“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,” Lion added.

The company also said that the commercial hard liquor industry had benefitted from the tax increase, as the tax hike on arrack had been just 24 percent.

Lion added that Sri Lanka is in a unique position, where products with the lowest alcohol per millilitre are taxed highest and those with the highest alcohol per millilitre are taxed the lowest.

“Thus, in one fell swoop, consumer health, government revenue and industry profitability have all been compromised,” it said.

The company said that it would be restructuring processes to adjust to the current operating environment.

For the third quarter ended December 2015, Lion at the company level posted a net profit of Rs.461.20 million, down from Rs.556.25 million year-on-year (YoY).

Revenue fell to Rs.8.23 billion from Rs.8.56 billion YoY as cost of production was reduced to Rs.6.01 billion from Rs.6.34 billion YoY. Distribution expenses fell to Rs.822.75 million from Rs.938.27 million YoY.

For the nine months ended December 2015, the company posted a net profit of Rs.1.74 billion, increasing from Rs.1.54 billion YoY, while revenue increased to Rs.27.17 billion from Rs.22.88 billion YoY and cost of sales increased to Rs.20.17 billion from Rs.16.88 billion YoY.

The income tax payment in the quarter rose 10 percent YoY Rs.336.4 million while for the nine months it rose 14 percent YoY to Rs.896.9 million.