Regulations that leave the country’s liquor consumers high and dry

Dated 14th April, 2016

Regulatory authorities are as addicted to and puzzled by the alcohol industry as a consumer is by the drink itself.

Excessive taxation led to expensive liquor which in turn sprung up incidents of hooch tragedies caused by toxic bootleg liquor. An all-out ban in Gujarat created ‘folders’ who now have lucrative careers smuggling and selling alcohol. “Prohibition just did not work,” said Lalsawta, Mizoram’s Finance Minister, in an Al Jazeera report. The northeastern State revoked its 18-year-old ban in January, 2015, while neighbour Manipur, lifted prohibition in five hill districts in 2002 and has been considering complete revocation since 2014, owing to cheap tipple produced in Assam finding its way into the State, thereby cheating the State of its revenue. A ban on advertisements for alcoholic beverages led to surrogate advertising, wherein companies promote their brands using alternative products or brand extensions – CDs, mineral water, events and sports franchises. To top it all, the States are now unwilling to let the rich brew be regulated by Goods and Service Tax (GST), thereby falling out of their sole control.

Alcohol is a State subject in the Constitution of India and therefore State governments have the exclusive power to control its manufacture, possession, transportation, purchase and sale. This State-governed taxation policy is one of the most opaque and graft-ridden systems with price manipulations, political patronage (liquor manufacturers use ethanol that is distilled from molasses, which is a by-product in sugar manufacture. Sugar mills are controlled by politicians and prices are determined by the political party that has the most clout) and illegal imports into high-tax and alcohol-prohibited States. The fact that the trade is usually off the books only adds to the already messy affair.

Liquor and GST

Bringing the liquor industry within the purview of GST will push through the need for documentation – evasion would be a complicated process given how documents leave behind an audit trail.
“GST on alcohol will lead to incremental revenue of Rs 800-1,000 crore for every percentage point of GST. The industry is willing to bear the additional tax burden of Rs 20,000 crore for greater transparency and better regulation when there is seamless coordination between the Centre and State administrations that can help plug revenue leakages,” said Sonjoy Mohanty, Secretary General at International Spirits and Wines Association of India (ISWAI).

Despite vehement protests by the representatives of the industry, liquor has been left out of the proposed GST scheme owing to the fear States have over losing one of their biggest sources of revenue.
The States ought to concur to general national interests and the Centre ought to push forth reforms on important bills like the GST. Dialogues between the Centre and the States cannot be sidelined, far less completely ignored, citing complexities in negotiations.

Also, leaving out liquor creates distortions in the input tax credit chain. Inputs would be taxed at GST rates while outputs from factories would attract State levies. This difference in taxation of inputs and outputs makes the input tax credit ineligible leading to high prices due to cascading effects.

Liquor and taxation rates

“Beer, if taxed rationally, positioned more liberally, viewed more positively will wean people away from hard liquor. This will therefore do immense good to society at large,” a report by All India Brewers Association (AIBA) stated. The association has been demanding a separate classification for beer from hard drinks given how the alcohol content in beer ranges from five to eight percent, which is significantly lower than that of the spirits category (42 percent).

“Today, a bottle of beer, say, retails at Rs 90 (with 33 ml alcohol) while a nip (180 ml) of regular whiskey (with 77 ml alcohol) retails at Rs 80. This drives the youth to spirits,” said Shobhan  Roy, Director General of AIBA, in a report to The Hindu.

With our ‘value for money’ outlook, we easily turn to hard liquor for a better high when seen amongst bottles of beer and wine. Taxing drinks based on their alcohol content would act as a deterrent to the consumption of hard liquor, slowly nudging people towards beverages which are the lesser among evils.

Smart taxation, as opposed to heavy taxation and prohibition, is the need of the hour. GST is the single biggest reform on the indirect taxes front that would amalgamate the several taxes now being imposed at the Centre and State level, thereby providing a common national market for goods and services. The simplification in the indirect tax regime would also make administration easier. GST is a game-changing reform for the Indian economy and leaving liquor out of its purview dampens the spirit of this hopeful new law.