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Dr. Sanjiv Agarwal By: Dr. Sanjiv Agarwal
June 30, 2023
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India is considered to be one of the highly taxed economies and it has all types of taxes- direct tax, indirect tax, local taxes…. When it comes to liquor industry which comprises of Indian Made Foreign Liquor (IMFL), Country Liquor (CL) and beer, it can be said that alco-beverages are one of the highest taxed commodity in India which is taxed by Union of India for direct taxes and indirect taxes on its indirect or ancillary incomes. Alco-beverages meant for human consumption is a state subject and it is only the State Governments who can tax alco-beverages. The taxes imposed are in the form of indirect taxes such as state excise duty (on production), value added tax (on supply of goods) and other local taxes, levies and fees (e.g. permit fee, license fee, octroi, entry tax and so on).

GST an India is now six years old. When GST was introduced in India w.e.f. 1st July, 2017, alco-beverages meant for human consumption was kept outside the tax net as no State Government wanted it to be included in the GST universe. Even petroleum products were included in its scope but levy of tax was kept in abeyance to be decided at a future date by the all empowered GST Council. The concept of one nation – one tax was to this extent distorted. The other left out sectors are gases, electricity and real estate.

India's alcoholic beverages/liquor sector is over-regulated by the State Governments with very high excise duties and taxes imposed on such companies. For them, it is an important source of revenue. Liquor sector is considered to be the second largest contributor of taxes to State Government exchequers. Liquor has been historically a major contributor to around 25-50% of revenues for states, and is also among the top three revenue streams of any state’s tax revenue. The states have complete control over the alcoholic beverage supply chain, from production and distribution to registration and retail, through their excise policies.

Indian is the third largest market for alco-beverages in the world and also one of the fastest growing sectors in the world. Indian alco-beverage industry contributes over Rs. 2.5 lakh crores in taxes per annum (in few states, contribution is even more than 50 percent), provide employment to over 25 lakh people, besides being the source of livelihood to over 50 lakh farmers. It supports many ancillary industries such as glass, plastic, paper and many sectors in services including logistics, transportation, warehousing, packaging, cargo-handling, advertisement etc. It directly promotes and supports travel, tourism and hospitality industry.

Due to the nature of the product and the revenue involved, alcohol for human consumption is subject to regulation by state governments. All entities involved in the manufacture, distribution, and sale of alcoholic beverages are subject to different approvals and licences for business operations, in their respective states. Despite the emphasis on improving ease of doing business in India, the industry continues to face a myriad of restrictive policies and complex, excessive regulation.

The production of alcohol for human consumption (being a state subject) is taxed as per individual states’ Excise Acts, Rules and standards by State Excise Department, The Food Safety and Standards Authority of India, The Legal Metrology Act and Bureau of Indian Standards regulate the alco-beverage sector. There is considerable scope to simplify processes for ease of doing business in the industry. Different tax regimes, price determination models, regulations, and levels of openness has resulted in India having 36 different markets for alcohol industry.

In India, all States have a varied range of governance and pricing models for alcoholic beverages. Costing of liquor is also very high in India because the inputs used to manufacture liquor were taxed at 12%-15% under the VAT regime before GST. However, after the introduction of GST, most of the input raw material now attracts 18% GST resulting in increased input cost.

Alcoholic beverages are among the top three revenue generators in the majority of states. Alcohol has also aided states and Union Territories (with legislatures) in increasing their ‘own tax revenue’ earnings. Since GST is not applicable to alcohol, other taxes and fees still apply, including excise duty on the manufacture of alcoholic beverages for human consumption, state value-added tax (VAT) on sales, and fees like gallonage fees and licence fees. The contribution of alcohol taxes to the exchequer is even higher for the north-eastern states.

With the robust growth expected, due to multi-brand new products and a whole class of new and young customers, it is high time that Union of India, State Governments and GST Council (which comprises of both), work out a politically acceptable formula to economically tax alco-beverages to a common tax, GST, in larger public interest and nation’s interest.

With country to face general elections after one year in May, 2024, it would be desirable for the present Government to take up the matter to GST Council and try convince all its constitutions to agree to bring alco-beverages into the GST fold. Such a move could be a win-win situation for all stakeholders– Government (more tax revenue, less leakages, tax efficiency, less evasion); Producers (lower cost, better tax efficiency, lower tax cascading, input tax credit, lower prices, bigger market); consumers (competitive prices, lower prices) and so on.  In other words, what looks like a political bottleneck may prove to be a sound economic decision, if it is decided to bring alco-beverages into the GST net.


By: Dr. Sanjiv Agarwal - June 30, 2023



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