IT MAY have met with a wary response from most quarters but last week's Commission on Taxation report may deliver a lifeline to the country's drinks industry after recommending that the government review excise duty on alcohol.

The proposal has been enthusiastically embraced by drinks companies which are struggling amid an unprecedented and accelerating collapse in alcohol sales over the past year. Earlier this month, Irish Distillers, the company behind Jameson whiskey, reported that the Irish spirits market had shrunk by 20% between January and June. It also indicated that wine sales fell by almost 7.5% in the year to June. The revelation came weeks after the country's two largest brewers, Diageo and Heineken, indicated that beer sales had fallen by between 3% and 4% during the same period, with Heineken warning that the outlook for its Irish operation was "weak and unclear".

Meanwhile, the one drinks producer that has increased its volumes, C&C, has only done so after ploughing increasing sums into marketing: it recently allocated a further €8m for advertising during the later part of this year. Even then, sales of its flagship product, Bulmers cider, have only risen by 1% as a result of this strategy.

Kieran Tobin, chairman of the Drinks Industry Group of Ireland (DIGI) said that this year has proven to be exceptionally difficult for the whole drinks industry and this has had serious economic implications.

"In recent months, we have seen pub chains go into examinership, a major brewer [Diageo] postponing its Irish investment plans and job losses in cider-making [at C&C]," said Tobin, who is also a director of Irish Distillers.

"It is very worrying because our export business is still doing quite well but you need a good sustainable home base to build on that. If you're starting a business or have a medium-sized brand, a strong home market is important."

Tobin said the industry had been hit by a general decline in consumption caused by the recession as well as the large number of consumers choosing to shop in the north, where alcohol prices are lower. "The proportion of people going to the north has increased over the past 12 months and the surge in numbers going there last Christmas has actually continued. The supermarkets there have also been discounting alcohol quite deeply and using it as a driver of footfall from the south," he said.

According to Tobin, northern retailers can undercut their southern counterparts because of the unusually high levels of excise duty charged on alcohol here. For instance, whiskey attracts excise duty of €39.25 per litre of pure alcohol here whereas in Britain the equivalent tax is just €25.70. To compound matters, Vat on drinks in Britain stands at 15% whereas the Irish rate is 21.5%.

"In the medium-term, the government needs to look at the fact that our alcohol tax rates are so heavily out of kilter with other EU states and are having a particular impact on the cost of living and the tourism sector," said Tobin.

The Vintners Federation of Ireland (VFI), which represents pubs outside Dublin, also believes that the current tax rates are hitting tourism, particularly as rural pubs have been particularly badly hit by the collapse in alcohol consumption. "According to our research, 35% of our members have seen a decline of over 20% in their business over the past year," said Padraig Cribben, the VFI's chief executive.

According to Cribben, this trend means that many rural pubs are in danger of closing, with serious implications for the tourism industry. "For a start, part of the attraction to tourists of Ireland is the chance to sample the famous Irish pub so anything that endangers that would be a major problem for the tourism industry. On top of that, pubs also provide basic services such as public toilets and food in rural areas where they aren't otherwise provided," he said.

The VFI's members tried a number of measures to attract customers back into pubs, the most controversial of which was an industry-wide price freeze announced last December, which was subsequently overturned by the High Court after the intervention of the Competition Authority.

On a more local level, individual pubs have tried special events, music festivals and expanded food menus in an attempt to regain lost custom but Cribben said that it had been "like trying to push a marble up a hill due to the high taxes and service charges our members face". He said the VFI welcomed the Commission on Taxation's recommendation for a review of the excise duty regime in principle but said "it all depends on what they mean by review".

"There's certainly no scope to increase the rates and while we'd like the government to decrease them, there's probably not much scope for them to do so until the medium-term."

It's not just pubs which have experienced a dramatic downturn in their trade – the country's off-licences, which experienced rapid growth during the boom, are also suffering. "People are cutting back their spending on everything and because alcohol expenditure is discretionary, our members have lost business," said Cathal McHugh, an off-licence owner and spokesman for the National Off-Licence Association (Noffla).

McHugh said Noffla's members had been losing business since last July, when the government introduced new restrictions on opening hours for off-licences in a bid to crack down on binge drinking.

"The problem is that they didn't introduce a range of other proposed measures on alcohol sales, including a ban on the below-cost selling of alcohol, following strong lobbying from the supermarkets," he said. "We feel that supermarkets are increasingly using alcohol as a carrot to get people into their stores. It's cynical marketing and it's damaging off- licences."

McHugh said that off-licences were also struggling to compete with their northern counterparts even though the off-licence industry has traditionally been a low-margin business. "Our prices are as a cheap as they can be given the current legal framework and cost structure. The problem is that excise duty and Vat levels are so high that they are just driving our business across the border."