Sri Lanka’s tax on liquor manufacturers to boost market share of Distilleries Corp: Fitch

Feb 27, 2015 (LBO) – Sri Lanka’s market leader in alcoholic beverage production Distilleries Corporation of Sri Lanka (DIST) would be able to expand its market share due to the large monthly tax imposed on liquor manufactures which ultimately discourages new players and smaller players, a rating agency said.

Sri Lanka’s new administration proposed a 200 million rupees monthly tax on all producers, regardless of their size, in the interim budget for 2015.
“The government’s plans to impose a minimum tax of LKR200m per month on liquor manufacturers will deter new players and adversely impact the profitability of smaller players,” Fitch Ratings said in a statement.

“This is likely to allow the larger producers such as DIST to gain market share.”

Fitch said, DIST accounted for 53 percent of Sri Lanka’s total alcoholic beverage production and 79 percent of the country’s total arrack production.

DIST’s arrack production accounts for over 95 percent of its volumes.
Government measures including increases in public-sector salaries and allowances, and reductions in the prices of essential goods, fuel and electricity are likely to increase real disposable income, which would lead to an uptick in spirit consumption, Fitch said.

However economic analysts says Killing competition and expanding monopoly power are also fundamentally contrary to the ‘Social Market Economy’ that the new administration hopes to create.

Fitch said arrack production fell 12 percent in 2013 on top of a 9 percent fall in 2012, resulting in a market share contraction for arrack, the main market for DIST but Beer demand continues to grow. Latest statistics show domestic beer production rose 21 percent in 2013, compared with growth of 14 percent in 2012.

Liquor taxes expected to account for an estimated 5.1 percent of total government revenue in 2014, Fitch said.

Fitch affirmed a top ‘AAA (lka)’ credit rating for Distilleries.