Sri Lanka killer taxes on small firms to boost dominance of Distilleries Corp

COLOMBO (EconomyNext) - Sri Lanka's large alcohol makers such as Distilleries Corporation of Sri Lanka which is already the market leader will be able to expand market share if a large monthly tax is imposed on smaller producers, a rating agency has said.

Fitch Ratings said according to latest data, Distilleries accounted for 53 percent of total alcohol production and 79 percent of total 'arrack', the most popular hard liquor consumed in the country. 

In a revised budget for 2015, Sri Lanka's new administration has proposed a 200 million rupees a month tax on all producers, regardless of their size.

The tax "will deter new players and adversely impact the profitability of smaller players. 

"This is likely to allow the larger producers such as [Distilleries] to gain market share," Fitch Ratings said.

Fitch said arrack production fell 12 percent in 2013 on top of a 9 percent fall in 2012, and the market contracted, though beer sales have grown.

Sri Lanka's tax revenues had been hit by illegally produced alcohol by some individuals who were close to the last regime, according to industry sources. The budget said an auction system would be started to give new licences.

But analysts say killing small firms through high levies, goes against the fundamental principles of tax law. 

Taxes are expected to be extracted like a 'bee taking honey from a flower' according to time honoured South Asian fiscal policy dating back to the Gupta period and is now adopted as a model by the West and the International Monetary Fund.

Killing competition and expanding monopoly power are also fundamentally contrary to the 'Social Market Economy' that the new administration hopes to create.

Fitch said a hike in public sector salaries and reduction is prices of essential goods and electricity prices will lead to an uptick in spirit consumption.

Fitch confirmed a top 'AAA (lka)' credit rating for Distilleries.