Ceylon Beverage Holdings says they are witnessing an exponential growth of ‘Kasippu‘ (moonshine), illicit arrack and illicit toddy as the prices of legal alcoholic beverages are out of consumers' reach.

Announcing latest financial reports, Ceylon Beverage further said Policy makers should be cognizant of the fact that tax hikes on the Alcohol industry, an industry with a large illicit component, will be counterproductive in the current depressed conditions as volume declines offset duty increases, thereby impacting this steady source of revenue to Government.

Ceylon Beverage Holdings further says:

The quarter under review saw the first glimpses of the slowing down of inflation, but the high prices had an overall impact on purchasing power of consumers which resulted in the overall FMCG volumes in Sri Lanka being impacted. The beer industry witnessed a 77% increase in prices driven by Excise Duty, VAT and SSL taxes during the period leading up to January resulting in volumes declining for the quarter compared to the previous year.

The situation has deteriorated in January following the 20% increase in excise taxes. We are witnessing an exponential growth of ‘Kasippu” (moonshine), illicit arrack and illicit toddy as the prices of legal alcoholic beverages are out of consumers' reach.

Early signs are that the January excise tax increase is struggling. January excise tax collection has declined in excess of 10% year-on-year. The situation looks worse in February. Six weeks into the year, the full year excise tax target seems difficult to achieve. Indeed, at the current run-rate, the jury is out on whether 2023 taxes will even reach the 2022 amount.

Policy makers should be cognizant of the fact that tax hikes on the Alcohol industry, an industry with a large illicit component, will be counterproductive in the current depressed conditions as volume declines offset duty increases, thereby impacting this steady source of revenue to Government. If there is a decline in excise taxes year-on-year of over 10%, even after a 20% increase in tax rates, then it would appear that we are past the point of optimal taxation.

In the face of this, we strongly advocate for sensible taxation and allow time for consumer earnings power to recover.

With the domestic business under pressure for the foreseeable future, the Group is increasing its already high focus on international business. Spend behind product, brand, distribution and people is increasing. Returns on this spend are not only uncertain but will take time to materialize.

Despite efforts to manage costs, given continuing cost inflation and declining domestic volumes, profitability will be subdued.