Excise tax on alcohol constituted around 5% of government revenue in 2014 and successive governments have consistently used it as a tool to boost revenue to bridge budget deficits.
The government increased taxes on liquor twice in 2015, as it did in 2014. Excise duty on locally produced hard liquor has increased 25% in 2015 as a result, compared with 70% for strong beer (more than 5% alcohol).
However, taxes on mild beer (less than 5% alcohol), already taxed more on an equivalent-alcohol basis, increased only 7%, making taxes more comparable on an equivalent-alcohol basis across products.
Fitch in a report said that they expect a slowdown in hard liquor-to-beer substitution in 2016 with excise duties on beer increasing significantly above those on hard liquor. As such, Fitch believes beer manufacturers, such as Lion, would be compelled to increase prices at a faster pace compared with liquor manufacturers to reflect the revised taxes, which could negatively affect demand.
"The duty hike in 2015 has resulted in the taxes on strong beer overtaking that of hard liquor on an equivalent alcohol basis, which we believe would slow down the demand shift to beer as the former gets more expensive," said Fitch. Strong beer constituted 90% of beer production in the country in 2014, and reported the highest growth rate in the industry. Beer production rose 4% in 2014, following a 21% increase in 2013, while hard liquor production has declined 12% in the last two years.
Super taxes
Apart from revenue taxes, effective corporate-tax rate for alcoholic-beverage companies was reduced to 37.5% from 40% under the 2016 budget, but is higher compared to the 15%-30% for other companies. Both DIST and Lion were subjected to a super-gains tax on their previous year's taxable income amounting to LKR2.0bn and LKR300m, respectively, in addition to the normal corporate tax.
"Given the strong cash reserves at both entities, we do not expect the additional tax burden to have a significant impact on entities' leverage or liquidity; neither do we expect such taxes to recur," it said.
www.ceylontoday.lk
The government increased taxes on liquor twice in 2015, as it did in 2014. Excise duty on locally produced hard liquor has increased 25% in 2015 as a result, compared with 70% for strong beer (more than 5% alcohol).
However, taxes on mild beer (less than 5% alcohol), already taxed more on an equivalent-alcohol basis, increased only 7%, making taxes more comparable on an equivalent-alcohol basis across products.
Fitch in a report said that they expect a slowdown in hard liquor-to-beer substitution in 2016 with excise duties on beer increasing significantly above those on hard liquor. As such, Fitch believes beer manufacturers, such as Lion, would be compelled to increase prices at a faster pace compared with liquor manufacturers to reflect the revised taxes, which could negatively affect demand.
"The duty hike in 2015 has resulted in the taxes on strong beer overtaking that of hard liquor on an equivalent alcohol basis, which we believe would slow down the demand shift to beer as the former gets more expensive," said Fitch. Strong beer constituted 90% of beer production in the country in 2014, and reported the highest growth rate in the industry. Beer production rose 4% in 2014, following a 21% increase in 2013, while hard liquor production has declined 12% in the last two years.
Super taxes
Apart from revenue taxes, effective corporate-tax rate for alcoholic-beverage companies was reduced to 37.5% from 40% under the 2016 budget, but is higher compared to the 15%-30% for other companies. Both DIST and Lion were subjected to a super-gains tax on their previous year's taxable income amounting to LKR2.0bn and LKR300m, respectively, in addition to the normal corporate tax.
"Given the strong cash reserves at both entities, we do not expect the additional tax burden to have a significant impact on entities' leverage or liquidity; neither do we expect such taxes to recur," it said.
www.ceylontoday.lk
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