African Distillers Limited (Afdis), the country’s largest maker of spirits and wines, says it tumbled to a loss this year after government in January doubled excise duty on its products, the second increase in just six months.
Excise duty is a tax levied on locally manufactured goods.
The first United States dollar adjustment in July last year raised the duty to 20% in ad valorem terms, a tax rule that applies tax in proportion to the estimated value of the goods, as opposed to a specific rate based on quantity.
The tax shock stoked the price of locally-manufactured wines and spirits and bid up the cost of sales, trimming margins and decimating market share.
Afdis operates a distillery in Mutare, which produces international brands under licence, and is the official distribution and marketing agent for a number of international spirits and wines in the country.
“The doubling of the ad valorem excise duty from 20% to 40% in January had a major adverse effect on the second half and was primarily responsible for the change from a small profit at half year, to a trading loss for the full-year,” Afdis said in an abridged financial report for its full-year to June 30.
Full-year earnings after taxation declined to a loss position of $1,54 million from a marginal profit in the first half ended December 31 2009.
Profitability slumped inversely as volumes and sales surged. Volumes and sales increased 70% from the year before, driven by low-priced products, mostly foreign brands.
Gross sales rose to $14,8 million, supported by a robust increase in output volumes, and so did excise duty, which surged to $2,75 million, taking about 18,57% of turnover.
Effected in ad valorem terms, the excise duty handed a duty advantage to imported spirits and wines, boosting their demand elasticity relative to the more-taxed brands.
This is typical of any trading environment where competition and sales heavily depend on the level of domestic disposable incomes, which determines the capacity for discretionary spending.
The company is 30% controlled by Delta Corporation Limited, Zimbabwe’s prime producer and distributor of alcoholic and non-alcoholic beverages.