Sri Lanka sees sharp increase alcohol taxes up to April

ECONOMYNEXT – Excise duties from alcohol rose 48.9 percent to 33.5 billion rupees in the first four months of the year while excise taxes from motor vehicles spiked, partly due a continued destruction of the value added tax system, official data shows.

Taxes from hard alcohol rose 32 percent with a 9 percent increase in production, an interim report from the Treasury showed.

Alcohol tax revenues have risen sharply after a new administration cracked down on smuggled ethanol which was turned into hard alcohol in at least three distilleries connected to politicians of the last regime.

Industry sources say a large part of an ‘increase in production’ was due to the shifting on capacity from the underground market to other producers who were now declaring real volumes to the authorities.

In addition to smuggling without paying taxes, ethanol was also imported tax free saying it was to make perfume. Large volumes of perfume was then reported as being produced.

Excise tax from motor vehicles also jumped 125.5 percent to 66.5 billion rupees as vehicle imports rose sharply with low interest rates, which also discouraged savings.

The increase in vehicle excise was partly due to shifting levies earlier charged as Value added tax to excise, the finance ministry said.

Sri Lanka systematically destroyed the VAT system during the last regime by giving exemptions reducing the rate and helping a state retail chain avoid taxes.

The destruction of the VAT system – which works best when there is only one flat rate such as 20 percent – began in a 2001-2004 administration when it hid VAT invoices from the public and started charging multiple rates.

Though VAT was extended to the wholesale and retail trade two years ago, it was again undermined by LakSathosa, a state retail chain that was able to sell goods at the same price as chains owned by the people and void paying the tax.





The state chain has of over 300 stores built with people’s tax money and every rupee of sales that shifts from tax-paying super markets to LakSathosa results in a loss of revenues and contributes to a lower tax-to-gross-domestic-product ratio, critics say.

LakSathosa is to be bailed out from 7.5 billion rupees of people’s tax money this year.

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