Govt. introduces indexation for excise taxes
The government has introduced an annual indexation mechanism for excisable goods, including alcoholic beverages. This move adjusts excise duties for liquor under the Excise Ordinance.
Overall, the new indexation mechanism and revised excise policies are designed to ensure that taxes on liquor and tobacco products are adjusted annually to reflect inflation and economic conditions, a senior official of the Finance Ministry disclosed.
It aims to address the shifting trends in alcohol consumption in Sri Lanka. This policy aligns Sri Lanka’s taxation practices with international standards, aiming to reduce revenue volatility and discourage the growth of illicit markets, he added.
As a result, excise duties for products such as Special Arrack, Coconut Arrack, Locally Manufactured Foreign Liquor, Beer, Wine, and Cider saw an increase of 5.9 per cent.
While the average annual consumption is around 90 million litres of spirits per year, the government has been grappling with rising illicit alcohol consumption, which currently stands at approximately 30-35 million litres, Excise Department statistics showed.
In response to these problems, the government has intensified enforcement, which has led to a 22 per cent increase in legal liquor manufacture and a 23 per cent growth in excise collections in early 2025.
The decline in hard liquor consumption can be attributed to increasing prices and the broader economic challenges facing the nation, an official of the department said. The decrease in legal alcohol consumption has been accompanied by a concerning rise in the consumption of illicit alcohol, which threatens both public health and government revenue.
To counter such challenges, the government has enhanced enforcement efforts, and the outcome has been an increase of 22 per cent in legitimate liquor manufacturing and 23 per cent hike in excise revenue at the start of 2025. The thrust is aimed at reducing the illegal liquor trade while safeguarding fiscal health through higher excise revenues. As a component of a multifaceted strategy in addressing the consumption of illicit alcohol, the government has proposed that new alcoholic drinks that are safe and of good quality be introduced.
A suggestion is to produce arrack with 25 per cent alcohol content in 180ml bottles, the most popular size consumed in Sri Lanka.
Additionally, molasses spirit of the Pelwatte and Sevanagala distilleries, for which there is insufficient market demand currently, can be utilised to produce these suggested products, thereby retaining excise revenue and fulfilling consumer demand.
The Committee on Public Finance also considered the tax structure on cigarettes, examining the current system of calculating taxes and its implication on government revenue.
It was proposed that a decrease in the tax bands could be capable of increasing revenue, especially in consideration of the fact that Sri Lanka’s cigarette tax-to-price ratio remains lower than the global benchmark of 75 per cent.
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