No sugar tax reduction yet for beverages

– Carbonated beverage firms still being taxed
– No gazette was ever issued

By Charindra Chandrasena

Contrary to reports, there has been no reduction in the sugar tax on carbonated beverages due to developments which followed the initial decision in early December.

Former President Mahinda Rajapaksa, while holding the post of Prime Minister and Finance Minister in the disputed Government, ordered a reduction in the sugar tax on sweetened beverages by 40% on 1 December.

This was following a meeting with several beverage manufacturing firms in the country on 30 November.

However, the Interim Order issued by the Court of Appeal the following Monday (3) preventing the functioning of Mahinda Rajapaksa as Prime Minister or Finance Minister had also prevented the issuance of the relevant gazette reducing the sugar tax.

A tax of 50 cents per gram of sugar in sweetened beverages was imposed in November last year by President Maithripala Sirisena to combat non-communicable diseases (NCD) in the country and became effective overnight.

The tax specifically targeted the carbonated soft drinks segment, which is dominated by local player Ceylon Cold Stores (CCS) or Elephant House, and two multinational giants – Coca-Cola and Pepsi.

Speaking to The Sunday Morning Business on condition of anonymity, industry insiders said that as the gazette had not been issued, they are operating as before, and that there had been no change in their profit margins or retail prices.

Furthermore, they also said that even if the gazette had been issued, the prices would not have come down immediately until the existing stocks were finished.

Any amendments to retail prices may also have been a collective decision made in consultation between all three players as opposed to an individual decision of one company, as all three companies are a part of The Beverage Association of Sri Lanka (BAOSL) – an industry collective.

The Sunday Morning Business spoke to Nielsen Sri Lanka Managing Director Sharang Pant on the impact the sugar tax had over the past year on the CSD sector in Sri Lanka.

Pant said that a few years ago, the CSD industry was the fastest growing food and beverage sector. It reported a 16-17% growth in 2016 owing to a drought which drove consumption and attractive packaging and expansion in distribution networks.

However, the growth rate had slowed down since 2017 with a relatively better monsoon.

According to Pant, 2Q 2017 witnessed a 9% volume growth year-on-year (YoY), which went down to 3% during the 3Q 2017 YoY before suffering degrowth of 15% in 4Q 2017 YoY.

However, as a result of higher inflation and the introduction of the sugar tax, previously witnessed declines became more significant in 2018, which was the first full quarter that was affected by the sugar tax.

“The bulk of the decline actually started in 2018. During the 1Q 2018, the volume of beverage sales declined by 27%,” he said.

He added: “One reason is sugar tax. The other reason is that food inflation was around 13-14% and the consumer was feeling the high prices.”

The decline extended to the 3Q 2018, marking a drastic decline of 40%.

Following the imposition of the sugar tax, the popularity of sugar-free variants increased driven by a more health conscious market. Sugar-free variants entered the local beverage market in 2018, which mitigated the impact of the decline in volumes to a certain extent.

Coke and Pepsi had a sugar-free variant globally which it promoted heavily from 4Q 2018. Elephant House introduced its own sugar-free variant in the first half of 2018.

The Sunday Morning Business reliably learnt that Pepsi has been affected the most by the sugar tax in terms of volumes.

Neither a threshold level of tax free sugar nor an adjustment time period was given to beverage manufacturers and as reported by The Sunday Morning Business last week, beverage sales of Elephant House, Coca Cola Lanka (Pvt.) Ltd., Ceylon Cold Stores, and Varun Beverages Lanka (Pvt.) Ltd. were impacted due to the sugar tax as the retail prices went up by 40%.

In an equities research report based on the performance of 267 listed firms, First Capital Holdings reported that earnings at Ceylon Cold Stores fell 31% in the third quarter of 2018, compared to the same quarter in 2017 as a result of the sugar tax. The Sunday Morning Business reliably learnt that the industry has had to shelve plans of major expansion and investments over the past 12 months owing to the sugar tax.