The tax burden on alcohol has significantly increased. As of July 1, 2023, taxes on absolute proof alcohol were raised from 5,000 rupees to 6,000 rupees per liter, with an additional 840 rupees bringing the total duty to 6,840 rupees.

As Sri Lanka grapples with a severe economic downturn, high alcohol taxes are driving consumers toward illegal alternatives, according to Harry Jayewardena, head of Distilleries Corporation Sri Lanka (DCSL). Jayewardena’s remarks come amid a significant downturn in the company’s sales over the past year.

In a recent annual report to shareholders, Jayewardena highlighted the unintended consequences of the government’s current taxation policies on the legal alcohol sector. “Looking ahead, it is evident that the current tax policies, if maintained, will have detrimental effects on the legal alcohol sector,” he warned. The skyrocketing prices due to these taxes are pushing consumers towards illegal substances, including homemade alcohol known as “kasippu,” which poses significant health risks.

Jayewardena emphasized the urgent need for policymakers to reassess their approach. “The affordability of legal alcohol is likely to decrease further, pushing consumers towards harmful, illegal alternatives,” he said. He called for a balanced taxation policy that could make legal alcohol more accessible while also deterring the use of illicit products.

Sri Lanka’s economic crisis, marked by a dramatic depreciation of its currency, has exacerbated the situation. In 2022, the Sri Lankan rupee plummeted from 200 to 360 per US dollar, following a series of inflationary policies and currency interventions. Although the rupee has since stabilized to around 300 to the US dollar amid deflationary measures, the economic instability persists.

Punitive alcohol taxes

The tax burden on alcohol has significantly increased. As of July 1, 2023, taxes on absolute proof alcohol were raised from 5,000 rupees to 6,000 rupees per liter, with an additional 840 rupees bringing the total duty to 6,840 rupees. These hikes have led to a 58 per cent rise in alcohol prices, widening the price gap between legal and illicit alcohol markets.

In addition to the excise taxes, alcohol is subject to other sales taxes, including an 18% value-added tax and a 2.5 per cent Social Security Contribution Levy. These combined taxes have not only pushed legal alcohol out of reach for many but also fueled the growth of illegal alcohol production and sales.

Despite increased raids and efforts to curb illicit alcohol, the proliferation of kasippu continues. YouTube videos detailing how to make this homemade liquor have garnered millions of views, and there are reports of government workers and others turning to kasippu as a more affordable option. While a standard bottle of legal arrack costs around 3,500 rupees, a quarter bag of kasippu is priced between 300 and 350 rupees, highlighting the stark cost disparity.

As Sri Lanka navigates its economic crisis, the challenge remains to address the fallout from punitive alcohol taxes and to strike a balance that protects both public health and economic stability.