Time to optimise taxes on liquor biz

Such a step will be a win-win situation for all

Governments across the globe tax liquor and related products. They also control and regulate sales. Owing to the local licensing fees and a range of state controls on the trade of liquor, the consumers often end up paying four or five times more than the price at a distillery.

While governments increase taxes to boost revenue they argue that high taxes help keep the prices of liquor and beer high to limit consumption. But lower sales reduce revenues and force consumers to down grade creating higher sales of brands with low margins. This affects the growth of companies, creating more cheap brands in the market place and creating demand for aspirational imported brands.

The 29 states along with seven union territories in India have adopted different approaches when it comes to taxing and regulating liquor. For instance, the state of Gujarat has entirely banned trade and consumption of liquor since 1961. By contrast, Puducherry, the territory on the Coromandel Coast, earns most of its revenue from alcohol trade.

Some states auction retail and wholesale licenses, while others have their own monopolies. Tamil Nadu is one state that has a monopoly on the alcohol trade and employs more than 30,000 people with over 6,000 outlets.

Even though liquor hasn't been brought under the purview of Goods and Services Tax, it still falls under other taxes that contribute to its rising prices. These taxes are: Excise Duty and VAT (Value Added Tax).

Alcohol was not brought under the purview of GST regime primarily due to two reasons: To ensure that the State Governments continue to have a strong inflow of revenue (other than what they get from GST). It's estimated that taxes on liquor and beer fetch the State governments nearly Rs 90,000 crore annually.

In spite of GST not being levied on liquor, the prices of liquor continue to rise after the rollout of Goods and Services Tax. This is because the inputs used to manufacture liquor were taxed at 12-15 per cent under the VAT regime before GST. However, after the introduction of GST most of the input raw material now attract 18 per cent GST resulting in increased input cost. This rise in taxes on the inputs is passed on to the end customers.

The other reason for the sharp increase in the cost of liquor is the applicability of GST on transportation and freight charges. Previously, transportation and freight attracted a service tax of around 15 per cent. However, post-GST, they are taxed at 18 per cent. Hence, even with no major changes in the VAT rates charged on beer or liquor, the cost of beer and liquor had increased due to the increase in input taxes.

The liquor industry isn't much supportive of the government's decision to exempt liquor from the ambit of GST. Exempting liquor from GST has led to a rise in the overall cost due to the increased taxes on the inputs. Further, as the output is a tax-exempt product for the manufacturers they need to pay input taxes on inputs and then claim the refund of ITC (input tax credit) accumulated. This is a long process, which leads to the lengthening of the working capital cycle.

Most of the liquor manufacturers believe that there's no point in excluding beer from the purview of GST as the alcohol content by volume is only 5 per cent. Most of the industry insiders wish that beer is brought under the GST regime this will have a remarkable impact on the flourishing tourism industry.

"The notion that alcohol is not price sensitive is greatly misplaced. We have been highlighting that alcohol is highly price elastic product. The inclination of some state Governments to impose high taxes on alcohol, assuming it will yield greater revenues, is greatly misplaced. There is empirical evidence that price increases above 5-10 per cent tend to start suppressing demand causing fall in sales volume, thus defeating the whole purpose of tax increase."

"It is also a well-established fact that with rising prices consumers tend to downgrade to cheaper options. Cheaper options mean less tax per bottle to the Government. Which means that the tax collected by the Government not only goes down in proportion to the fall in sales, it is further pushed down due to less tax per bottle on cheaper options."

"High taxes and resultant prices also lead to several other law and order issues such as rise in smuggling of alcohol from neighbouring states, counterfeiting of alcohol and production of illegal alcohol and hooch which is a known health hazard.

Vinod Giri, Director General, CIABC, reckons, "We are glad to note that some state Governments that had imposed high taxes have reviewed information provided by us or obtained from their own sources, and have rolled back tax increases. However, some states continue to persist with high taxes. We are concerned about what future holds in those states and have highlighted to respective Governments that they must roll back tax increases in order to arrest the fall in sales, sustain tax collection, and prevent consumer misery,"Giri said.

Urging state governments to cut down corona tax on alcohol to "reasonable" levels, Giri said: "As a responsible representative of the Indian alcohol industry, CIABC takes it upon itself to collect, analyse and share data with various Governments in the hope that it is used to evolve a regulatory policy framework that works to the benefit of all stakeholders, i.e., the industry, the Government, the trade, the consumers and the society in general. "In these difficult times when entire industry and economic activities are shut, the states' coffers are taking a big hit. Indian alcoholic beverage industry is the major source of revenues for the state governments. It contributes around Rs 2 lakh crore per annum as revenues to the government. Tax on alcohol consists of 20-40 per cent of tax revenues of States. A total ban on liquor deprives state governments of own revenue so vitally required in fighting Covid-19. We employ 20 lakh workforce and assist livelihood of 40 lakh farmers. Under current circumstances when our earnings are zero, we cannot sustain for long. This will lead to huge job cuts and massive financial losses. The state governments need to urgently consider opening of sale," CIABC Director General Vinod Giri said.

Giri further noted that prolonged unavailability of legal alcohol has serious consequences. "There are growing reports of liquor smuggling, sale of illicit and spurious liquor, and looting of shops. These not only deprive state of legitimate tax revenues, they also pose grave threat to public health and law & order."

By Vincent Fernandes