By: Staff Writer
April 21, Colombo (LNW): In a strategic move to combat illicit alcohol trade and stabilize government revenue, the Sri Lankan government has introduced an annual indexation mechanism for excisable goods, including alcoholic beverages. This policy adjusts excise duties under the Excise Ordinance to reflect inflation and current economic conditions, aligning with global best practices.
A senior Finance Ministry official revealed that the new tax structure particularly targets products such as Special Arrack, Coconut Arrack, Locally Manufactured Foreign Liquor, Beer, Wine, and Cider, all of which saw a 5.9% increase in excise duties under the revised framework. This measure seeks to address shifting trends in alcohol consumption while narrowing the gap between legal and illicit markets.
Despite Sri Lanka recording an average annual consumption of around 90 million liters of spirits, the country faces a persistent challenge with illicit alcohol, which accounts for an estimated 30–35 million liters annually, according to the Excise Department. A notable decline in hard liquor consumption—from 26 million liters in 2022 to 19.31 million liters in 2024—is largely attributed to increased prices and broader economic hardships.
However, this decline in legal alcohol consumption has coincided with a worrying rise in illicit alcohol use, raising serious concerns over public health and the erosion of government revenue. In response, the government has intensified enforcement, which has already resulted in a 22% increase in legitimate liquor production and a 23% surge in excise collections in early 2025.
Authorities credit this turnaround to enhanced vigilance by the Excise Department, which has helped reverse the sluggish trend seen in 2023 and 2024. The renewed focus on enforcement is part of a multifaceted strategy to shorten the illegal liquor supply chain and protect fiscal health through robust excise revenue generation.
Looking ahead, the government is also exploring innovative approaches to redirect consumer demand toward safer, regulated products. One such proposal includes the introduction of 25% alcohol content arrack in 180ml bottles—the most commonly consumed size in Sri Lanka. This initiative would utilize underutilized molasses spirits from the Pelwatte and Sevanagala distilleries, helping to retain excise revenue while meeting consumer needs with safer alternatives.
On the tobacco front, the Committee on Public Finance has examined the existing cigarette taxation model and its impact on state income. Discussions are underway on whether narrowing the tax bands could potentially enhance revenue, especially given that Sri Lanka’s cigarette tax-to-price ratio is still below the global benchmark of 75%.In conclusion, the introduction of excise tax indexation and complementary policy reforms represent a significant step by the Sri Lankan government to modernize tax practices, reduce the harmful impact of illicit trade, and secure a more predictable stream of revenue for the country’s development needs.
