ECONOMYNEXT – A switch to beer that was taking place especially among younger people, with proportionate levies would slow after a tax hikes by the new administration pushes more people towards hard alcohol, Fitch a rating agency said.
"The speed at which drinkers are switching to beer from hard liquor should slow down somewhat in 2016, as taxes on a 100 percent alcohol by volume basis on strong beer have surpassed that of hard liquor after back-to-back tax increases in October and November 2015," Fitch Ratings said in an analysis of alcohol firms.
"Spirits makers have been facing increased competition from beer producers – given the growing popularity of beer among the younger population, competitive pricing on the basis of pure alcohol content and rapid urbanisation in post-war Sri Lanka."
Distilleries would also gain market share as some smaller players are killed by a 200 million rupee a month tax on distillers.
The tax would cause small players who account for about 10 percent of the market to exit, the firm said.
The large players in the market are Distilleries Corporation of Stassen group of Harry Jayewardene and WM Mendis, belonging to the Perpetual group Sri Lanka’s Aloysius family.
The rating agency would still have a stable outlook and inelastic demand would allow Distilleries Corporation of Sri Lanka rated AAA/stable and Lion Brewery pass the tax increases to customers without shifting demand to the cheaper illicit market at least during this year.
Margins may be pressured in early 2016 as not all increases are passed to customers, the rating agency said.
But if taxes are raised again, some people may shift to the illicit market.
"Companies may find it difficult to revise prices on a regular basis if the government decides to raise taxes multiple times in the same year as seen in 2015 and that could adversely affect profitability," Fitch said.
"Similarly, consumers may shy away from the mainstream market if the price increases are significant and imposed at short intervals."
Sri Lanka’s new administration needs more money to pay state workers after a sharp rise in salaries made as an election promise and the rest of society have to pay up to maintain the large state sector.
The Government Medical Officers Association (GMOA), also took industrial action after the new administration tried to end tax free cars to doctors and other state workers.
The elected ruling class also objected to Finance Minister Ravi Karunanayake’s move to scrap tax free cars to them and treat private citizens, state workers and the legislators equally.
The Finance Ministry said about 147 billion rupees or about 0.5 percent of gross domestic product in taxes are lost every year due to tax free cars given to politicians and state workers. (Colombo/Dec09/2015)