The rashness demonstrated by the new regime in making tax policies has not only made the business of brewing tougher than ever but also pushed the people towards hard liquor, which is arguably more detrimental to health.
According to the country’s top brewer, Lion Brewery Ceylon PLC (LION), the alcohol industry has now been made liable for not just the higher excise duty, which was raised back in October 2014, but also for the higher value-added tax (VAT), which came into effect from November 1, 2016, making the total tax increase on beer up to 70 percent compared to the 25 percent increase in taxes on spirits.
“The beer industry – to a degree greater than the others in the alcohol sector – has been at the receiving end of this type of ad hoc and incomprehensible policymaking for many years.
With the advent of this government, we hoped things would change and that a more rational approach would prevail.
Unfortunately, this has not been the case and today Sri Lankans consume a significantly greater amount of hard alcohol than they did two years ago,” the company said in a note to its interim financial accounts released to the Colombo Stock Exchange recently.
This irrational tax policy by the government appears to have pushed the people to consume more spirits and toddy, while the consumption of beer has reduced by 39 percent. But the consumption of spirits has increased by 9 percent during the same period.
Alcohol consumption in a country could go up either if the population is extremely happy or they have been made extremely poor. While the former condition mostly drives the demand for formal liquor and a milder version of alcohol such as beer, the latter condition could drive the demand for illicit liquor or moonshine.
Therefore, excessive taxing of the formal alcohol industry could in fact boomerang on the government both economically and socially. But successive governments milked both the tobacco and alcohol industries whenever they found their exchequers depleted.
But analysts point out that this strategy could become futile as the demand will not remain inelastic forever.
“Whilst empirical evidence strongly indicates that there has been a very significant increase in the consumption of toddy, available records hide this fact since the quantities manufactured are not accurately disclosed by the producers,” LION said.
Toddy has now become an extremely unhealthy beverage made in the most unhygienic conditions and no longer of coconut sap but made now of a chemical concoction. The alcohol industry was exempted from VAT in October 2014 by the Rajapaksa administration to bring revenue neutrality, i.e., excise taxes were increased then to recover the loss from VAT.
However, with effect from November 1, 2016, the industry is now liable under higher excise duty and higher VAT.
The country’s belligerent finance minister pushed the VAT Amendment Bill through parliament to satisfy the International Monetary Fund (IMF), which gave a US $ 1.5 billion bailout package in June to arrest a possible balance of payment crisis.
“We hope however, that better sense will prevail sooner rather than later,” the company finally added.
Lion Brewery September in red due to flood-induced factory closure
Lion Brewery Ceylon PLC (LION) said its financial performance was badly affected by the floods in the month of May, which wrecked havoc, bringing the brewing in the facility into a complete standstill.
As a result, the company turned a net loss of Rs.477.2 million or a loss per share of Rs.5.97 during the quarter ended September 30, 2016 (2Q17), from a profit of Rs.695.4 million a year ago.
However, the company managed to continue its supplies to the market, albeit below potential capacity, through imports that came from four Carlsberg breweries in the Asian region.
“We placed our brewers in the locations that supplied us our own brands to ensure the quality and consistency consumers expect from us,” the company said in a statement. The government considered LION among “other similarly affected businesses” to import, “specified quantity”,
at taxes limited to the value of the local excise duty for which the company expressed its deep appreciation.
Nevertheless, a case is pending at the courts contesting the relief granted on imported beer by the Trade and Investment Policy Department, with the concurrence of the finance minister and this case is coming up for hearing on December 15.
Despite the company trying to keep up with the demand through imports, the top line contracted by 55 percent year-on-year (YoY) to Rs.4.45 billion. For the six months ended September 30 (1H17), revenue fell 47 percent YoY to Rs.10.0 billion.
“Due to logistical reasons, the imports mentioned above were restricted to cans. Thus, our major SKU, bottles, were not available in the market – other than for relatively smaller quantities of Carlsberg and Carlsberg Special Brew – whilst the brewery was not in production. As a result, sales were hampered and our results impacted,” the company noted.
Meanwhile, for the 1H17, the company incurred a loss of Rs.954.2 million or Rs.11.93 a share, against the Rs.1.27 billion net profit earned during the same period last year. During this period, the company’s borrowings rose sharply by around Rs.6.5 billion to a total of Rs.11.3 billion as the company had to depend on bank borrowings until the insurance claims are finalized, which is expected to be concluded before the end of the ongoing financial year.
Based on the preliminary assessment of the damage caused to the investors and to some fixed assets due to flooding, an interim claim was submitted for which the company received an advance payment of Rs.300 million during the period.
The damaged facility however is now in commercial operation, the company said.
As of September 30, Ceylon Beverage Holdings PLC held a 52.25 percent stake, while Carlsberg Brewery Malaysia Berhad held a 25 percent stake.
Carson Cumberbatch PLC held another 5.13 percent stake being the third largest shareholder.