By: Staff Writer
April 27, Colombo (LNW): The Sri Lankan government has introduced an annual indexation mechanism for excisable goods, including alcoholic beverages, marking a major shift in taxation policy. This move will adjust excise duties under the Excise Ordinance each year, aligning taxes with inflation and broader economic conditions, a senior Finance Ministry official disclosed.
The new policy aims to reflect international best practices, reduce revenue volatility, and curb the growth of the illicit alcohol market. Excise duties on products such as Special Arrack, Coconut Arrack, Locally Manufactured Foreign Liquor, Beer, Wine, and Cider have already been raised by 5.9 percent under this mechanism.
Despite an annual consumption of around 90 million liters of spirits, the government has been battling a surge in illicit alcohol consumption, which now stands at 30–35 million liters per year, according to Excise Department statistics. A significant drop in hard liquor consumption—from 26 million liters in 2022 to 19.31 million liters in 2024—has been attributed to rising prices and ongoing economic hardships, a senior department official noted.
This reduction in legal alcohol consumption has been paralleled by a concerning increase in illicit liquor use, raising public health risks and eroding government revenues. To counter these challenges, authorities have intensified enforcement efforts, leading to a 22 percent rise in legitimate liquor production and a 23 percent boost in excise collections in early 2025. The Excise Department’s heightened vigilance has helped reverse the slowdown seen in 2023 and 2024, focusing on reducing illegal trade and safeguarding fiscal stability.
As part of a broader strategy, the government is also encouraging the introduction of safer, high-quality alcoholic beverages. One proposal involves producing arrack with 25 percent alcohol content in 180ml bottles—the most popular size among Sri Lankan consumers. Furthermore, underutilized molasses spirit from the Pelwatte and Sevanagala distilleries could be used to create these new products, retaining excise revenues and satisfying consumer demand.
Meanwhile, the Committee on Public Finance has reviewed the cigarette tax structure, questioning the current tax calculation methods and their impact on revenue. It was suggested that reducing the number of tax bands could potentially increase revenue, especially since Sri Lanka’s cigarette tax-to-price ratio remains below the global benchmark of 75 percent.
In a parallel move, the government has also introduced indexation of the cess on liquor. Instead of setting fixed cess rates, the cess will now be adjusted periodically, likely using the Colombo Consumer Price Index (CCPI). As inflation remains high following the 2022 economic crisis, indexation is intended to maintain the real value of tax revenues.
However, while indexation is expected to initially boost government revenues as liquor prices rise in line with inflation, there are risks. Continued price hikes could lead to reduced legal alcohol consumption, a shift towards cheaper and illicit products, and potential erosion of revenue over time.
Additionally, the expansion of the illicit liquor market, disproportionate impacts on lower-income consumers, and the increased need for enforcement could further strain government resources.
The government’s strategy marks a balancing act—protecting revenues in an inflationary environment while trying to curb illicit alcohol consumption and its associated risks.
