Sri Lanka’s dodgy distillers build retail chains for tax-fraud arrack: DCSL

ECONOMYNEXT – Several licensed distillers in Sri Lanka have built distribution chains to sell tax-unpaid arrack by operating their own retail outlet networks, though they are prohibited from doing so under current law, the country’s largest legal alcohol maker has said.

Officers of Sri Lanka’s excise authorities have also bought so-called ‘FL4’ alcohol retail licenses to sell illegal alcohol, Chairman of Distilleries Corporation of Sri Lanka Chairman Harry Jayewardene told shareholders in the annual report.

The alcohol retail outlets are commonly known as ‘bars’ though they are ‘off-licenses’ where bottles have to be sold intact and consumption within the premises is not allowed.

Sri Lanka has about 1,000 such shops including in supermarkets, but six distilleries are controlling about 225 retail outlets Jayewardene said through their ‘kith and kin’ while authorities are not taking action.

"This is about 1/5th of the total licenses," he said. "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 Excise Department.

"The fact that these unscrupulous manufacturers are paying such staggering prices to obtain a license itself is a proof of the existence of such illegal trade and indicates how rampant corruption has spread like a deadly disease in the industry."

According to industry estimates a retail license is sold for up to 50 to 100 million rupees depending on the average sales of the area in question. A part of it may be paid up front, and the balance may come in part payments over several years.

The ‘sale price’ could be an SUV costing about 50 to 80 million rupees or some such asset and not traceable cash.

Bars may also be ‘leased’ for 10 years of more with about 30 million rupees being paid up front and the balance monthly. The ‘lease rent’ could be around 500,000 rupees a month or more depending on the sales of the outlet.

While distillers who pay taxes give around 50 to 60 rupees sales commission for a bottle, tax dodgers give 100 or 200 commission while selling around the same price as the market leader, by not paying the full taxes on some bottles, according to some sources.





However in the case of a wine store owned directly by a dodgy distiller about 1200 rupees margin can be made off a bottle by selling alcohol on which no taxes have been paid.

On a rule of thumb, assuming a wine store sells about 500 bottles of legal arrack a day (arrack sales peak at the end of the month and on holidays and is not regular) it would have revenues of about 900,000 rupees a month.

However if the store sold sold tax-unpaid arrack, revenues would be about 18 million rupees a month. If only a quarter of the alcohol was tax unpaid revenues would be 5.1 million rupees a month.

If just 10 percent of the arrack was tax unpaid, revenues would be 2.6 million rupees a month, making it easy to pay 500,000 or more rupees a month in ‘lease rent’ to the legal owner.

Jayewardene suggests adding more regulations to solve the problem, despite existing laws on the payment of taxes, not being enforced and the enforcers themselves engaging in dodgy practices with impunity.

"Although we have continuously requested the regulator to rescind the said condition from the excise notification whereby excise licenses could be transferred to another, our requests have fallen on deaf ears to date," Jayewardene said.

"Very soon the balance licenses that are available also will be absorbed by the unscrupulous manufacturers to dispose their illegal products with ease."

Economic analysts if ‘leases’ are used to unofficially transfer licenses, stopping the sale of off-licenses will not work. Most problems in markets come from state regulations in the first place.

Rampant tax -avoidance for example comes because taxes are unreasonably high and the price of legal alcohol is unreasonably high.

If licenses are freely transferable, at least the legal owners are transparent and enforcement would be easier, analysts say. The earlier practice was a feudal style personal ownership which was passed down through inheritance, which has no place in a modern society.

There have been charges earlier that DCSL itself was blocking competitor’s products being on the shelves of wine stores by using their relationships with wine store owners which drove some players to try to control stores directly.

However defenders of DCSL say that it is not so, and the firm may have withheld products from some dealers because they found that illegal products were being sold or dodgy owners were using its brand as ‘bait’ and saying Distilleries products were not available on odd days to force customers to buy illegal products on which margins were higher.

Economic analysts say options for further de-regulating the market should be carefully studied.

Allowing manufacturers including DCSL also transparently own retail units through a subsidiary, or in a joint venture with major retail chains may be one option.

Enforcing existing tax laws, which is the core problem also has to be addressed, which may require a clean-up of the excise department, and sacking officers who own wine stores, which is a clear conflict of interest.

However the excessive rates of taxation may promote corruption of new recruits also.

Other options include making taxes more reasonable over time by or increasing taxes in the future.

Economic analysts say many illegal behaviours in society are triggered by state regulation.

Smuggling comes from excessively high import duties, black markets come from price controls and match fixing is worse in countries like India where gambling is illegal. (Colombo/Sept04/2018)

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