ECONOMYNEXT – A wide-ranging distribution racket aimed at earning billions of rupees by avoiding tax, from the illegal control of a network of alcohol retail licenses, producers and politically connected individuals, is worsening, a top industry official has warned.
"When compared with last year we have noted a substantial decrease in sales and as a result our tax contribution to the State was reduced in the current year," Chairman of Distilleries Corporation of Sri Lanka Harry Jaywardena told shareholders in the annual report.
"We could observe that the legal alcohol industry is shrinking due to the increase in the illegal production of liquor.
"Government taxes were increased on two occasions during the year which led to a further reduction in consumption."
Jayawardena said in the year to March 2019 the firm paid a total of 58 billion rupees in taxes, down from 64 billion rupees in the previous year.
Sri Lanka saw monetary instability with the rupee collapsing from 153 to 182 in 2018 as well as a political crisis. Easter Sunday attacks came in the next financial year.
Jaywardena said, high taxes, weak enforcement of existing rules, and corruption was promoting illegal moonshine and ‘artificial toddy’, the sale of tax unpaid alcohol via the legal distribution system with the illegal control of licenses expanding year after year.
Alcohol is taxed at high rates, and is also under tight regulation giving incentives for people to avoid taxes, bend rules and capture regulators.
"Regretfully today the price of legally produced arrack is beyond the reach of the common man and naturally the consumer has to turn to local brew," Jayawardena said.
"Such pricing policies are only pushing consumers away from legal products and encouraging and facilitating bootleggers to thrive."
Under longstanding excise rules in Sri Lanka a manufacturer cannot legally own and run a retail outlet which is known as an FL4 license.
Retail outlets used to be family businesses, which were passed down by inheritance. From 2008, un-related persons were allowed to buy an existing license by paying a fee.
Some manufacturers also own networks of retail outlets through third parties, industry officials say.
Many licenses are being consolidated among a few persons, who are paying large sums of money to get hold of them, indicating that the profits made are higher than the margin a manufacturer who is paying all taxes can, Jayawardena said.
Industry sources say license are being sold at high prices with SUV worth 60 to 80 million rupees being given as non-cash consideration, industry sources say.
The money will then be recovered by selling tax unpaid alcohol.
Licenses are now also owned and controlled by excise officers, leading to a breakdown in enforcement.
The networks of retail outlets are being used to sell tax unpaid alcohol produced by several small distilleries.
Last year Jayawardena said about 225 licenses were in the hands of 6 individuals.
"This issue has reached an unprecedented level, whereby 6 individuals are currently controlling over 250 retail outlets out of approximately 1,000 outlets in the name of their relations, friends and kith & kin, thereby defrauding the State of billions of Rupees whilst the regulators turn a deaf ear and blind eye.
"This is about 1/5th of the distribution channels.
"It is disheartening to note that even some officers from the enforcement authority are operating FL4 licenses using other names to find a market for illegal products, and this is very well known to the Department.
"Very soon the remaining licenses that are available will also be snapped up by the unscrupulous manufacturers to dispose their illegal, imitated products with ease."
Jayewardena had also been warning that producers of genuine coconut toddy also cannot compete with so-called artificially toddy made with sugar and other additives.
Some manufacturers who are selling ‘coconut arrack’, do not use genuine coconut toddy, he said. (Colombo/Aug15/2019)