Business

Liquor sticker by June 2020?

By Madhusha Thavapalakumar

An Excise Notification was issued recently, making the implementation of the widely opposed foolproof sticker requirement for local liquor products compulsory from 1 June 2020, The Sunday Morning Business reliably learns.
The notification was issued on 1 November by MP Mangala Samaraweera in his capacity as the Minister of Finance at the time. However, it is still unclear whether newly appointed Premier Mahinda Rajapaksa, who is now the Minister of Finance, will proceed with the gazette as is.
Speaking to The Sunday Morning Business, Treasury Deputy Secretary A.R. Desapriya noted that it is premature to disclose any information on the implementation of this Excise Ordinance as they are yet to have a discussion with the new Finance Minister.
Excise Notification No. 6 of 2019 published in Gazette Extraordinary No. 2128/30 on 1 November 2019 notes that importers of liquor products have to adhere to the new sticker requirement prior to 20 September 2019 while a licensed manufacturer has to adhere prior to 1 June 2020. According to the Department of Excise, importers have already adhered to the requirement.
Nevertheless, the local liquor industry continues to vehemently oppose the notification as it was issued in contradiction to an agreement that was reached on 13 August to move forward with the digital coding system instead of manual pasting.
For this agreement, concurrence of the Minister Mangala Samaraweera was also obtained, The Sunday Morning Business learns.
According to a senior official from the Department of Excise, since a digital method had not been identified for the implementation of the requirement, it would be implemented based on manual pasting as planned initially.
Following the issuance of the new Excise Notification, the industry wrote to the Ministry of Finance that per-hour production capacity at their manufacturing facilities is much higher than the sticker applicators’ per-hour pasting capacity and the letter sought the Minister’s intervention to remove the deadlock and ensure smooth functioning for local manufacturers. As of Tuesday (26), the industry is yet to receive a response from the Ministry of Finance.
The letter reiterated that the industry welcomed the digital coding system that was piloted at selected liquor manufacturing facilities in August as it would be a superior alternative to the outdated manual sticker pasting and would also be faster and less expensive.
Further, the industry noted that a digital coding system can be implemented within three to four months as the relevant machinery can be ordered, while industry sources told The Sunday MorningBusiness that manual pasting would require a minimum of one year for preparation and would still be inefficient compared to digital coding.
The Sunday Morning Business reliably learns that in addition to this, the local arm of a renowned global supplier of beverage industry equipment, which at the moment supplies equipment to leading liquor manufacturers, wrote a letter to the Deputy Commissioner of Excise on 12 August stating that the manual printing suggestion was impossible to implement.
The letter noted that they can supply tax strip machines for up to 40,000 bottles per hour in glass bottles and 60,000 cans per hour depending on the condition of the material used for tax strip labels for bottles and cans.
However, per hour production of this local arm’s suppliers are much higher than the aforementioned numbers. Therefore the machinery needs modifications at a heavy cost and also extra space.
The letter further detailed difficulties in the implementation of the manual sticker pasting process in terms of technicality and machinery.
The company noted that for one of its customers, who is a leading local liquor supplier, a newly designed machine to fulfil this new requirement would cost over € 4 million and the supply of machinery would take 10-11 months while the commissioning would take another four months, during which the manufacturer has to stop production and remove the existing machineries as well.
If the commissioning is done successfully, it would still take over one-and-a-half months for the erection of new building parts and breaking of walls as a result of commissioning, and also noted that the removal of the existing machinery and transportation of new machinery would be difficult and not possible without breaking the walls of the building.
Further, it noted that the removal and unloading of bottles from the conveyors or crates, pasting the tax strip on it, and the reloading it into the conveyors/crates may need more than 600 labourers, and their customer’s area was not sufficient to accommodate even 25 labourers to handle pasting the manual tax strip in the machine room.
It also went on to mention that the reloading of the bottles with the tax strips back into the crates may damage the synchronisation speed of the machine. At this stage, it explained, there would be frequent stoppages in the bottling line, resulting in loss of daily production targets.
In another case of another customer of this global company, there is no space to introduce another additional labelling machine to the glass bottling line; not even a single conveyor’s length can be accommodated.
Further, the local arm also said there was no easy way of removing the existing labelling machinery from the production floor, and said that were this requirement to be made mandatory, they would be left with no choice but to remove the roof of the building to do so, but even in that case, a crane reaching the height of 600 metres required to carry out this task would not be available.
However, the same letter noted that the supplier of the stickers that have to be manually pasted, i.e. Indian company Madras Security Printers (MSP), which was selected by the Sri Lankan Government through a tender, contacted the Asia-Pacific office of this global company and discussed with them the possibility of using their stickers.
The Head of Sales of the Asia-Pacific company in response had informed the Indian company that the samples they received from their local customers were observed by international engineers, through which they noted that the quality of the samples was not suitable for use in high-speed machines.
According to the opinions of this global company’s engineers, the stickers have to be manufactured according to operation requirement of the machines.

Background

As exclusively reported by The Sunday Morning Business on 25 August, owing to the threats of a closure of operations by local alcohol manufacturers, particularly the Distilleries Company of Sri Lanka PLC (DCSL) and Lion Brewery PLC, the two biggest hard liquor and beer manufacturers, respectively, the Government was forced to postpone the implementation of the law which was initially scheduled to come into effect from 22 August.
Responding to these threats, in a meeting on 13 August, the Ministry of Finance and the Department of Excise assured the industry that a digital solution would be provided as the manual pasting of stickers consumes more time and has high labour costs, as the Government was sympathetic towards these concerns at that point.
Due to the decision to shift to a digital solution, manufacturers were also assured by former Minister of Finance Mangala Samaraweera that the previously awarded tender for the manual pasting of stickers would be changed.
However, during a meeting on 23 September chaired by former Treasury Deputy Secretary A.K. Seneviratne, the Ministry of Finance had compelled stakeholders to comply with the physical and manual pasting of stickers within three months’ time, The Sunday Morning Business reliably learnt.
In the meeting, it was noted that based on a technical committee report done recently, the Department of Excise decided to implement the requirement for a foolproof sticker instead of a digital authentication code, and a digital option was not discussed at all. It should also be highlighted that no changes were made to the tender despite the earlier promise.
In response, the industry vehemently expressed their opposition and requested for a grace period of one year to import the required machinery to adhere with the requirement.
Reliable sources indicated that several deadlines for implementation were discussed but no agreement was reached, and the chair of the meeting assured the industry that he would get back with a date following discussions with Minister Samaraweera, but nothing was communicated following that.
Sources added that even though the industry welcomes the new sticker requirement, it is extremely unhappy about the Government’s decision to come back to the initial discussion of manual pasting and trying to forcibly implement it, regardless of continuous lobbying by stakeholders.
On 20 June, the Finance Ministry issued Excise Notification No. 04/2019 under the Extraordinary Gazette No. 2128/30, stating that all liquor manufacturers would be required to paste a “foolproof” sticker on all bottles and cans, effective 20 August.
In addition to this, the industry was worried about the insufficient time provided to comply with the requirement and the additional costs involved in the printing of the new stickers, which amounted to Rs. 2 per can or bottle.
Moreover, as exclusively reported by The Sunday MorningBusiness on 6 October, the Indian sticker supplier which has a history of corruption in foreign markets was awarded the tender for printing foolproof stickers for local liquor products despite strong industry opposition.
The Sri Lankan Government had repeatedly chosen to continue working with this company, which was initially awarded the tender in 2016, without consulting stakeholders.
The sticker requirement, in the pipeline for months, received Cabinet approval recently, allowing it to proceed to obtain parliamentary approval. One of the main aims of the new requirement was to curb the growing illicit liquor production in the country that reportedly causes billions in losses per annum to government revenue.
The Government expects to add Rs. 40 billion per annum to excise revenue under this sticker regime. According to the Ministry of Finance, the excise revenue target in 2019 was Rs. 130 billion, but it had only reached Rs. 68 billion as at end-July this year. The Department of Excise is also optimistic that this new sticker would result in better excise revenue in the second half of 2019 compared to the first half.