Fitch hints at likely rise in Excise tax on alcobev industry in November budget

• But says the increase won’t be too prohibitive to push consumer towards illicit liquor

Fitch Ratings last week hinted at a potential increase in the Excise tax on alcoholic beverages by the government in the upcoming budget, but said such moves, should there be any, would be limited to the near term and would not be too prohibitive to push people from shifting to illicit liquor, a development which will cause more revenue losses to the State.

In a rating report issued on Distilleries Company of Sri Lanka PLC (DIST) and its parent Melstacorp PLC, the rating agency expected some moderation in the pace of growth in spirits due to weaker personal incomes and escalating cost of living, although overall spirits sales are expected to remain resilient in the next 12-18 months despite the pandemic-induced disruptions, due to its defensive nature. 

Fitch affirmed the two entities’ ratings at AAA last week, maintaining a Stable outlook, considering the market leadership assumed by DIST in the spirits market, which helped the group to keep cash flows resilient despite the temporary yet material losses in the leisure sector, operated under Aitken Spence PLC where Melstacorp has 51 percent stake. 

This is reflected from the 3 percent growth in the spirits sector of the group recorded during the financial year ended in March 31, 2021 despite nearly three months long liquor store closures, as sales picked up in a robust fashion no sooner the stores reopened to reach pre-pandemic levels, reflecting the defensive nature and the strong pent up demand. 

DIST controls over 70 percent of the country’s spirits market. 

“We believe the government may increase Excise tax on alcoholic beverages in the near term amid its weakening finances,” said Fitch Ratings. 

“We believe any tax hikes will not be too prohibitive, to prevent consumers shifting to the illicit market which could lead to national revenue loss,” they added. 

Fitch showed that in 2020 tax revenues from spirits rose to 10 percent from 7 percent collected in a typical year as the government lost revenues from other sources due to the pandemic. 

Besides the potential increase in Excise tax on alcoholic beverages in the coming budget to strengthen the State revenues harshly battered by the pandemic induced economic restrictions during both 2020 and 2021, there could be few other measures also to raise the tax revenues, without hurting too much the overall stable tax policy.  

 However, the alcoholic beverage sector has been for years calling the government to further slash taxes on the industry, which will result in more tax revenues as people would return from illicit liquor which as been thriving due to the excessive prices in the formal alcoholic beverages in the country. 

Alcoholic beverages is a heavily taxed industry and often gets categorised under the so called ‘sin industries’ to be taxed the highest corporate income tax rate besides Excise and other taxes. 

Reflecting how the depletion of personal incomes had affected the formal liquor business, DIST Chairman and Managing Director, Harry Jayawardena showed they witnessed a drastic increase in the sale of their 180 millilitre bottles of liquor at the expense of the hitherto more popular 750 millilitre bottles which had fallen to “record levels”. 
In his annual letter to the shareholders released recently, he warned that unless the taxes and levies are brought down to make liquor affordable, coconut arrack will soon be the privilege of the wealthy.