Challenges mount for Sri Lanka’s legal liquor sector with volume drop, illicit market rise

By Nishel Fernando
The players in Sri Lanka’s liquor industry are grappling to stay afloat, due to a significant drop in volume, with the consumers increasingly turning to the illicit market amid heavy taxation and some industry players are resorting to corrupt practices to evade taxes in an attempt to stay competitive.
“We make high investments and we have high fixed costs. When the volume falls below a particular point, it becomes very hard to sustain. The whole pricing distortion happens because the illicit industry doesn’t pay the same amount of duty that the legal industry pays; so, there’s a massive price gap,” Sri Lanka’s second largest beer manufacturer Heniken Lanka Ltd Director Finance Samanthi Kariyawasam told a recent panel discussion held in Colombo.

By betting on the inelasticity of alcohol products, she noted that the government increased the excise duties on legal alcohol products to bolster revenue, in taking the easy path, without considering the other underling crucial economic factors, ultimately resulting in a drop in excise revenue.
Kariyawasam pointed out that while people are able to absorb small price increases, they tend to reduce consumption or move to something else in the event of a sharp price increase. 
She further said that the substantial increases in the excise duties and their timing are less than optimal, particularly when the middle class was impacted by the income tax hike and fuel price increases. 
Notably, their disposable income was at its lowest when the liquor price hike came into effect. 
“It’s a vicious cycle. Higher duties were implemented to boost revenue but it ended up yielding even lower revenue than what was recorded in 2022,” Kariyawasam noted.
The alcohol industry contributes to around 10 percent of the government tax revenue.
While the heavy taxation also saw the rise in the illicit market, Kariyawasam questioned about possible tax evasions by certain legal producers.
“Also, even when it comes to some of the legal players, there are questions whether they pay the taxes they are subjected to, when you look at the back-end discounts to outlets,” she said.
Moving forward, she warned that it may become extremely difficult for the genuine legal players to operate, if the current worrying trend of corruption and criminal activities engulf the industry.
“The whole thing causes social issues, in addition to health and safety issues, giving rise to criminal activities and corruption; so, when that creeps into the system, it’s becoming really difficult for a legal player to get something done because the system is used to high incentives and high kickbacks,” she pointed out.
She proposed to the government to review the current taxation policy to come with a structure to tax different classes of products based on health impacts, while increasing the accessibility to legal liquor products across the country to curb the illicit sector and relying more on technology to monitor potential revenue leakages on the supply side.