Lion Brewery (Ceylon) PLC, the country’s leading beer brewer, has once again focused on illicit alcohol producers profiting from the highly regulated enforcement environment and hefty taxes levied on the legitimate alcoholic beverages (Alcobev).
Mr. Suresh K. Shah, CEO/Director of Lion reported in the company’s recently released annual report that there were two excise duty increases during the year ended March 31, 2011 – in October 2011 and in March 2012.
During the year corporate tax rates had been reduced from 35% to 28% but the alcohol and tobacco industries had been excluded from this concession and subjected to a significantly higher 40% tax rate.
"Thus Alcobev businesses are now levied a corporate tax rate that is almost 45% higher than the standard rate," Shah said. "As a result Alcobev company margins are now squeezed, at both the top and the bottom by excise duties and corporate taxes respectively."
He said that price is just one of the tools used by the administration to control the consumption of alcohol. There were restrictions on promotion, distribution and hours of sales too applied under the "Mathata Thitha" policy.
"However, none of these methods are of much use; they do constrain the legal alcohol companies but had little impact in curbing demand for alcohol. The gap between demand and legal supply is comfortably filled by the deep-rooted illicit alcohol business that is widespread across the country.
"Illicit alcohol producers are hardly constrained by the rules of the Excise Department nor do they respect the National Alcohol and Tobacco Act."
Shah argued that due to the impact of taxation, legal alcohol is beyond the reach of the economically underprivileged, the segment that still accounts for the largest numbers in the country. Further, those outside urban areas had little or no access to legal alcohol due to regulations that restricts distribution.
"Due to these two reasons illicit alcohol is in widespread use across the country," he said.
He argued that recently there had been some efforts at controlling the spread of illicit alcohol through more effective enforcement. But enforcement addressed only the supply side.
"Yet the driver of the supply is demand – in turn higher prices and poor availability of legal alcohol – and enforcement cannot address this aspect of illicit alcohol consumption," Shah argued.
"If the blight of the illicit alcohol is to be addressed in a sustainable manner, it is essential that demand for the product is eliminated," he said. "This can be achieved if practical and pragmatic policies that address the issues of pricing and availability of legal alcohol are implemented.’’
He further urged that among legal alcoholic products, hard liquor is more affordable than the milder beer taxed at a higher rate. In terms of distribution and promotion "the two products are treated as equals although they are hardly that."
The result is that hard liquor is more popular with consumers than mild alcohols and this was not an ideal situation. In fact, the reverse is more appropriate.
"Policies that link taxation, availability and promotion to alcohol content will help achieve a more appropriate balance in alcohol consumption," he urged.
"Today Sri Lanka is in a unique position; the most dangerous form of alcohol – illicit – is the cheapest while the least harmful – is the most expensive," he said. "Legal hard alcohols lie in between the two."
It was not surprising that the country had multi alcohol related issues with prices driving the consumption of hard alcohols – both licit and illicit.
He said that the vast majority of alcohol related issues arise as a result of illicit alcohol consumption. Addressing these issues is possible with an appropriate policy response incorporating what he had urged. This will help resolve most of the problems, Shah said.
Lion Brewery, according to the company’s annual report is the third biggest revenue contributor to the government having paid Rs.11 billion in taxes during the last financial year, up 38% from a year earlier. The company estimates that it pays the government Rs.45 million in taxes every working day.