Will Rs. 200mn monthly levy on booze manufacturers wipe out small-timers?

Interim budget decision evokes mixed reactions

by Suresh Perera

The imposition of a minimum Rs. 200 million monthly levy on liquor manufacturers by the interim budget has evoked mixed reactions in the industry, with some players welcoming the move, but many others warning that it would sound the death knell to small-time businesses.

The provision for the new taxation on all liquor and beer producing companies was made to "discourage the small-time operators and rationalize the number of manufacturers", Finance Minister, Ravi Karunanayake explained in presenting the mini budget to Parliament.

Does this mean that the government wants existing licensed small-scale distilleries to put up shutters and throw hundreds of workers on to the streets?, an industry player queried.

At the end of the day, edging out small-time producers will boil down to dominance by three or four big companies, he cautioned. "They will call the shots".

At present, there are 28 manufacturing licenses and of them, 23 are small-scale distilleries, which employ around 4,000 persons, industry officials said. "Some of the small players are region-based, such as Uva Glen, for example, which caters largely to upcountry areas".

The average payment by lesser-known distillery companies down the line has been around Rs. 20 million per month (10% of the proposed tax), but the ten-fold increase could perhaps leave no option, but to consider closure, they warned.

In the current context, the Distilleries Company of Sri Lanka (DCSL) is the market leader, with the lion’s share of retail sales island-wide. Apart from three other large-scale manufacturers, scores of small players survive in the market particularly with an edge over pricing by offering their brands under a competitive structure, the officials noted.

With more players and more competition, the market share of the big timers has suffered a dent and the ad hoc Rs. 200 million taxation could possibly wipe out the peripheral liquor distillers thereby opening the flank for the top guns to regain lost ground, they predicted.

Any genuine, legitimate liquor distilling business should be able to pay Rs. 200 million per month, says Amal de Silva Wijeyeratne, CEO/MD, Rockland Distilleries Limited. "That is because it’s impossible to run an operation smaller than that".

The alcohol strength and volume automatically attracts taxation, but then how come some manufacturers sell their products at a much lower price?, he asked. "They are obviously not honoring their tax commitments".

Instead of paying Rs. 200 million per month as duty, they purchase retail liquor sales outlets and feed them with their un-invoiced stocks, Wijeyeratne asserted. "A legal alcohol manufacturing business, which is unable to pay the new tax, simply cannot exist".

An excise duty of 65% is imposed on liquor manufacturers – that’s Rs. 65 goes as duty for every Rs. 100 – followed by costs incurred in distilling, bottling, paying sales people and overheads. In addition there is another 40% tax, he elaborated.

"In this backdrop, running a smaller operation than this is out of the question, and a genuine and legal business should not find it difficult to pay Rs. 200 million monthly", he explained.

"We are also a small player in the market, but we honor all our regulatory commitments", Wijeyeratne said of Rockland Distilleries Limited, a pioneering family venture launched in 1924.

Perhaps, it is the government’s perception that all small manufactories are revenue manipulators and that big names don’t resort to malpractices, industry sources said. "On the contrary, it is the big guns in diverse sectors in Sri Lanka who have been accused of bribery and corruption".

Every aspect of the manufactory such as procurement, storage of spirits in bonded rooms and releasing such stocks, blending, finished products stock, invoices, transport permits and calculation of the statutory payments are handled by excise officers stationed in a factory. The key of the premises is kept by the OIC and raw materials can be procured and transported only with his permission, the sources noted.

Moreover, stocks of spirit and finished products are recorded and brands are released and transported to retail outlets with invoices and permits by the OIC, which are checked in transit at random by the police and excise. Excise duty, VAT and NBT are calculated on the basis of the excise formula and the turnover, they pointed out.

If there are manipulations in spite of these stringent procedures, the government should identify and rectify flaws in the existing mechanism without opting to push small-scale producers to the brink of disaster, they stressed.

In addition, there are 1,500 liquor licenses in operation. On an average, if these businesses employ four workers each, it works out to 6,000 persons in gainful employment, with thousands more dependents down the line, they said.

Tipplers said that Acme Lanka Distilleries, a small-scale manufacturer, had revised the price of their products by Rs. 40 per 750ml bottle last week following the imposition of an enhanced tax component.

Two senior officials of Hingurana Distilleries Limited and Randenigala Distilleries Lanka Limited didn’t return calls to The Sunday Island to discuss this contentious issue confronting the industry.

Asked whether the liquor trade has witnessed growth over recent years, Wijeyeratne said that with duty increases, the industry has shrunk in terms of volumes. "There has been a 7% drop".

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