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Why government imposes tax on liquors despite being big business
July, 09th 2012

Mumbai's drinkers may not be having much fun these days, courtesy assistant commissioner of police Vasant Dhoble, but they certainly deserve a toast from the Maharashtra government. In the last financial year, excise revenues for the state, almost all of it from sale of liquor, rose a jaw-dropping 48% from a year earlier.

During the height of the Mumbai drinking crisis, such as it was, excise commissioner Sanjay Mukherjee gave a slightly apologetic interview to Mid-Day acknowledging that the law which required tipplers to buy permits just to drink was outdated. But in the same vein he also pointed out that the state earns Rs 5 crore just from the sale of such permits, adding helpfully, that such permits were very easy to obtain, with a minimal amount of paperwork required.

State excise now accounts for a tenth of all Maharashtra state tax revenues. At the beginning of 2011-12, the state had sharply hiked excise duties on alcohol, which pushed up the price of a bottle of rum by over Rs 100. Consumption fell (which was expected), but this is the beauty of it as far as all states are concerned the drop in consumption wasn't sharp enough to offset the rise in price as a result total revenues from liquor rose.

The world over, governments love alcohol and cigarettes and even petrol for precisely this reason. Drinkers and smokers, even when faced with a sharp hike in prices, are unlikely to cut back consumption substantially enough to fully offset an increase in price and the net effect is a jump in revenues.

"Liquor has always been a milch cow for governments," says VN Raina, director general of the All-India Distillers' Association (AIDA). Uttar Pradesh recently announced a raise in excise taxes on alcohol by 50%.

Role Models from the South

Rs 5 crore from the sale of drinking permits may not be much money, but in an age of financial stringency for all governments, a few crores here and there count. Mukherjee didn't quite come out and say it, but there's logic why those permits may not go away anytime soon. Because the economics work the other way as well.

Cutting the effective 'price' of a drink by doing away with drink permits altogether, will not lead to a sudden influx of non-drinkers into bars, and liquor stores (thus enabling the government to make up what it lost in permit revenue from increased sales of alcohol). The government will probably lose all that revenue. In such circumstances, why would any self-respecting bureaucrat do such a silly thing?

But if revenue is the main objective, it's the southern states, especially Tamil Nadu, which are a true 'role model'. "Over the years, we have had officials from a number of states come to us to study how we work," says an official of the Tamil Nadu State Marketing Corporation (TASMAC).

TASMAC and its counterpart in the neighbouring state, the Kerala State Beverages Corporation, are unique in the country, because they have a state-sanctioned monopoly on both the wholesale and retail trade of Indian Made Foreign Liquor ( IMFL). Most other states have state corporations which control only one of the two usually wholesale, with retail being in private hands.

TASMAC earned the government over Rs 18,000 crore in 2011-12 from excise and sales taxes on the sale of alcohol the highest of any state. State excise comprised 17% of Tamil Nadu's tax revenue in 2010-11, though the actual tax revenue from alcohol is even higher, if you include sales tax.

In Karnataka, the share was 21%. The Tamil Nadu government earns roughly Rs 1,413 for every person in the state from the sale of liquor every year. Maharashtra earns only Rs 756 per person, though that's above the national average of about `576 per person. Interestingly, Kerala earns nowhere as much as TN, (at Rs 617 per person), despite operating on the same business model.

But What About the Drinker?

It's little wonder that a 2011 audit report by the Comptroller and Auditor General on Maharashtra's revenues, pointed admiringly to the southern states. "Andhra Pradesh, Karnataka and Tamil Nadu ... benefited significantly by canalising the entire supply of IMFL/beer whether domestically manufactured or received from other states through setting up of state beverage corporations for selling alcoholic beverages."

In this respect, Maharashtra, which doesn't have a state monopoly on either wholesale or retail, is not the most efficient when it comes to raising money from liquor. The main aim in taking over the retail trade, says the TASMAC official, was to plug duty evasion which leads to big revenues losses and to strike at the retail cartels which dominated the trade then.

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