Indiscriminate taxation bites off Sri Lanka’s F&B industry growth
In Sri Lanka, the mood within the F&B industry is bleak: the Government in its 2015 Budget proposals sets out an increase in Nation Building Tax (NBT) and Value Added Tax (VAT) as well as a 15-25% increase in the price of customs duty on imported wines and spirits. Unsurprisingly, this triple whammy is expected to hit growth in the F&B sector hard, there is no doubt consumption will drop – and industry experts are deeply concerned.
The move to increase taxation is particularly inexplicable, as the tourism sector is finally settling into a measured, post-conflict expansion, which could be jeopardised by the proposed increases. The higher taxes appear punitive to the local restaurant industry, which has just begun to find its feet, and the thousands of people it employs.
Local restaurateur Dharshan Munidasa points to Sri Lanka’s evolving wine market as a primary income generator for restaurants and the government. “Kaema Sutra, Nihonbashi and the Ministry of Crab have taken the local dining experience to new heights while introducing Sri Lankan cuisine to the world through unique and novel food concepts. Wine plays a big role in this increased sophistication of the local dining experience. Throughout the years, our restaurants have welcomed patrons of diverse income brackets, and a further increase in prices could damage this trend.”
Industry experts question the rationale behind the high tax burden the government plans to place on what is a significant growth market. At present, the price of a glass of wine in Sri Lanka is one of the most expensive in South East Asia – which consequently increases the cost of a meal. At the current level of taxation, it is more expensive to dine out in Sri Lanka than in Malaysia by a significant margin. The question is why the Government would choose to make our country less competitive for a very small gain in revenue collection?
Munidasa says the new taxes will cause the price of an average priced bottle of wine to skyrocket and while this may look positive for tax revenue it would have a wholly negative impact on the consumer.
“A drop in consumption of wine and spirits will also have a trickle effect on service staff, as the component of service charge would reduce, the anticipated downward trend in consumption is in effect an indirect pay-cut to service staff. We need to show Sri Lanka is current and on par with other destinations, and one way to do this is by not imposing exorbitant rates on wines and spirits.” Higher prices also mean a reduced incentive to expand, lower returns to human capital and lower job creation.
The proposed increase in custom duties on top of NBT and VAT is short-sighted and is sure to hamper growth in the F&B sector. It will discourage both local and foreign investors looking to enter Sri Lanka’s F&B industry.
A fair and consistent tax policy will encourage growth and enhance Sri Lanka’s profile as a destination for foreign investment in the F&B sectors. Appropriate and rational tax rates would be a first step in the right direction.
