Modelling the Revenue Implications of Alcohol Taxation in Sri Lanka

This Report was written by the Institute of Policy Sciences in Sri Lanka. The report estimates the impact of raising the excise tax on arrack and beer on government tax revenues, production, and consumption. Specifically, the researchers consider 14%, 20%, and 50% excise tax increase scenarios. The results suggest that the government revenues would increase by 4%, 6%, and 10%, respectively, in each scenario. For arrack specifically, the tax revenues would also increase by 4%, 6%, and 10%, respectively, while for beer, revenues would grow by 7%, 11%, and 24%, respectively. While excise tax revenue would increase following these tax increases, VAT revenue would fall by 40%, resulting in an overall reduction in revenues by 8% for both alcoholic beverages. Further research is needed to better understand these findings, especially given the massive drop in total tax revenue for beer. Production and consumption following these tax increases would understandably decrease. In each scenario, total production would decrease by 23%, 25%, and 36%, respectively, and more so for beer. Total consumption, on the other hand, would decrease from 14 million litres to 12.4, 12.0, and 10.0 million litres, respectively, and more so for arrack. The report concludes with recommendations for policy makers to increase excise taxes on alcoholic beverages, and highlights opportunities for further research on the topic. 

A Policy Brief based on the report can be found here.