Japanese Sake taxed lower than beer despite higher alcohol concentration

By Madhusha Thavapalakumar

Sake, a traditional Japanese alcoholic beverage, continues to enjoy lower taxation even two years after its entry to the Sri Lankan market, The Sunday Morning Business learnt.

Research carried out by Lion Brewery (Ceylon) PLC showed that such under-taxation was depriving the Government’s estimated tax revenue of Rs. 39.45 million per month.

However, despite repeated requests and concerns raised by the industry in this regard, sake continues to enjoy a position of privilege in the market while remaining in direct competition with other beer brands.

Furthermore, Lion Brewery Director and CEO Suresh Shah, in the company’s annual report 2018/19, noted that the product being sold under the name of “sake” was just an imitation.

“In recent times, a product pretending to be sake has been introduced to the market. The term sake is used to describe a traditional Japanese alcoholic beverage produced from rice using a process akin to brewing beer. The term sake can be used only if this very specific process is followed,” Shah noted in the annual report.

Originally, sake is made from fermented rice and is light in colour, noncarbonated, and contains up to 18% alcohol. It is made in a two-step process similar to that of brewing beer.
This locally produced sake carries alcohol content of 12.5% which is higher than that of beer. At the moment, sake is being taxed under the local wine category and was approved under a tax slab of Rs. 600 per absolute litre as per the Budget 2019, while each litre of beer is taxed Rs. 2,700. Before the Budget 2019, each bulk litre of sake was taxed at Rs. 100.

In simpler terms, the tax charged for a litre of sake is Rs. 75 under the new Budget while the tax charged for beer or wine with the same alcohol strength is Rs. 337.50.

The Sunday Morning Business learnt that Lion Brewery has been pointing out this loophole in the regulatory system for over a year to the Department of Excise and the Ministry of Finance, but no measures were taken to revise the tax on sake. In 2018 alone, Lion Brewery had sent five letters to the Department of Excise highlighting the loss of revenue to the industry.
We spoke to the Ministry of Finance Department of Fiscal Policy Director General K.A. Vimalenthirarajah to understand the rationale behind liquor taxation, and to shed light on the possible causes for this anomaly.
Vimalenthirarajah noted that the taxes on liquor products are decided mainly based on the absolute terms of alcohol concentration, and referred us to the Department of Excise for further elaboration.
The Sunday Morning Business contacted Department of Excise Deputy Commissioner Kapila Kumarasinghe seeking clarification on this matter. He stated taxation on liquor was not based solely on the alcohol percentage but also on the product’s brand positioning in the market, its societal effects, policy considerations, and the views of the industry, particularly in a revision.
“Liquor tax is decided on a case-by-case basis based on a number of factors and not merely on a liquor product’s alcohol concentration,” he said.
Kumarasinghe further noted that the revisions to the existing liquor tax system could only be made through the next Budget.
“If there are any ideas or requests from the industry players, they will surely be considered when liquor taxes are revised in the forthcoming Budget.”
The issue of the tax on sake came to light with Shah highlighting it in the company’s annual report.
“Sake imitates a beer. Yet, in alcohol terms, beer is restricted to an upper limit of 8.8% and attracts tax of Rs. 2,700 per litre of pure alcohol. Thus, we have a product with 42% more alcohol attracting just under a fifth of the tax levied on a competitor brand. This is certainly not a level playing field and we call on the authorities to correct this anomaly expeditiously,” Shah noted.
He also called upon policymakers to implement a formula – indexed to a suitable data point – through which future excise taxation will be determined as it would bring certainty to the industry.