Taxes killing demand – Lion Brewery

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By 2017-02-16

The taxes on beer are killing its demand, Sri Lanka's bear market leader Lion Brewery (Ceylon) PLC has stated in its latest quarterly financial statement.

The company said ,since the 70% increase in its tax in October and November 2015, beer volumes have declined by 40% and in the meantime, arrack – the tax of which was increased by a more palatable 25% - has seen a 14% growth in its volumes.
"If the intention of the steep tax increase on beer was to reduce consumption of legally made alcobevs, it has not worked since arrack volumes have......grown to compensate. Had the intention been to reduce consumption, the tax on arrack – a product far more harmful than beer – should also have been increased by or about 70%. Yet this was not the case," it stated.
It also said that had the intention been to increase revenue to government that too has been a failure.

In September 2015 – the month before the tax increase – the beer industry paid excise taxes of Rs 2,161 million. In January 2017, that is down to Rs 1,131 million. This is a Rs 1,030 million reduction in government revenue for the month which when annualized, amounts to Rs 12,360 million per annum (Rs 12.36 billion).
Then in November 2016 a 'beer can' tax – a world first - of Rs 10 and Rs 15 (for cans below and above 350ml respectively) was introduced. Again the objective is not clear.

"Why only beer cans? If the intention was to protect the environment, why not on similar packaging of other products including beverages? Irrational policy measures of this nature scare away all investors – not just brewers – and at a time when the country is seeking to expand its manufacturing base, this is counter-productive," the financial statement elaborated.

"The free run permitted to toddy manufacturers is another example of poor policy making. Toddy is produced under the most unhygienic conditions, using a mix of chemical compounds. In reality, what is currently sold as toddy is not fit for human consumption. Yet, its sale is encouraged by the application of a preferential tax.

"Whilst beer with an alcohol content of 5% or above is taxed at Rs 315 per litre, the tax on toddy – which has a similar alcohol content – is just Rs 50 per litre. As a result, consumers are shifting in large numbers to toddy. In revenue terms too, the government is losing out since available data clearly indicates that this industry is a habitual tax evader.

'In November 2016, VAT on alcohol products was re-introduced at the rate of 15%. Whilst this pushed prices up further, the tax in itself is not objectionable. At a time when all goods other than essentials are subjected to a VAT and where there is a need for revenue, exempting alcobevs from this tax is not equitable. However, the manner in which this was brought about was not equitable at all.

"Alcobevs were liable for VAT until October 2014 at which time it was removed from the industry. Such removal was not a benefit to the industry since the lost revenue was recouped by government through an increase in the excise duty applicable at the time. Indeed the industry lost out since it could no longer claim input VAT. Now when VAT is re-introduced, it's only equitable that the impact is made neutral by reducing the excise duty applicable. However, this was not done.

"Thus within a year, the beer industry has been hit multiple blows; an excise duty increase of 70%, a beer can tax and the re-introduction of VAT. As a result, in a short span of 15 months, the consumer cost of a bottle of beer has increased by 75% and it is not surprising then that beer industry volumes are down by 40%.

"On a turnover of Rs 15.4 billion, the company recorded a pre-tax loss of Rs 29.3 million during the nine-month period from 1 April to 31 December 2016. In the corresponding period last year, on a turnover of Rs 27.2 billion, the company earned a profit before tax of Rs 2.6 billion. The drop in revenue and volumes was primarily driven by the decline in demand for beer.
"The closure of the brewery (due to last May flood) was also a contributory factor. Whilst adequate quantities of beer were imported to cater to demand during the shutdown, on a number of instances containers were stuck in the port for long periods of time – at times as long as 21 days – for multiple reasons, all of which were beyond our control. As a result, port and related import costs increased. The CIF cost of imports were also more expensive than locally produced beer, by as much as Rs 687 million. Thus, margins were also impacted.

"All in all, it's been a very difficult time for the company. The challenges posed by the external environment – both natural and manmade – have been many and of significant proportions. The company operates under a patently unfair and discriminatory policy framework, it competes against arrack and toddy players, most of whom evade taxes and the brewery was devastated by floods and not in operation for almost six months. This is the base from which the company will re-build. It will be a strenuous turnaround but our consumers, brands and people give us the confidence that better days lie ahead."

The brewery recommenced commercial production on 10 November after a lapse of almost six months.
The company is currently in the process of finalizing the insurance claims with its consultants, insurers and loss adjusters.
"As of now, on interim claims submitted covering inventory, machinery and business interruption, insurers have committed settlements amounting to Rs 2 billion. Of this, Rs 1 billion has been received. We expect to finalize and conclude all claims before the end of June 2017," it said. (IG)

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