Government unlikely to raise taxes on alcohol in Nov. budget

• Fitch says taxing on spirits sector would be more gradual
• Points out prohibitive increases could hamper demand and govt. tax income
• Excise tax on alcoholic beverage is about 7% of govt.’s total tax revenue

The government is unlikely to raise excise duties on alcoholic beverages for the sake of revenue, and instead any move on taxing the sprits could be more gradual as steeper raise in duties could boomerang by way lower tax income as higher alcohol prices could dampen demand.

Sri Lanka’s government is set to present its maiden budget on November 17 and concerns have been raised over the slowdown in State revenue and resulting impact on the expansion of the budget deficit, which leads to higher government borrowings.

According to Fitch Ratings, any raise in excise duties on liquor could be more gradual in the medium term and hence may not feature in the coming budget just to rake in a few billions of rupees, which won’t be sustainable, either for the government or for the industry. 

“We expect excise tax increases on spirits to be more gradual in the medium term as prohibitive increases could hamper demand and government tax income,” Fitch said in a recent rating report.

The rating agency estimates the excise tax on alcoholic beverages to be around 7 percent of the government’s total tax revenue. 

Sri Lanka’s Treasury reported tax revenues of Rs.670.4 billion for the seven months to July, compared to Rs.944.4 billion recorded in the same period in 2019. 

But the tax revenues were seen starting to pick up from July onwards, trimming the gap from the year earlier levels, with the lifting of strict COVID-19 related curfews in mid-May.

Successive governments have tweaked and meddled with the excise duty on both alcoholic beverages and cigarettes to quickly fill up the dwindling exchequer. 

Distilleries Company of Sri Lanka PLC, Sri Lanka’s largest distiller of alcoholic beverage, earlier said the company remained concerned about the pandemic’s hit on the incomes of the bottom of the pyramid market segment, which could ebb their buying power. 

The company has a 70 percent market share and reported 30 percent lower sales in the April-June quarter compared to same period last year, as lockdowns hurt sales. 

The excise tax did not rise directly in the last 12 months but the Value-Added Tax and the Nation Building Tax on liquor sales were reclassified as excise tax, Fitch said. 

“This did not affect retail prices but widened the excise tax difference between spirits and beer to 24 percent from 20 percent in March 2019,” they added.