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Why Liquor Sales are Important for the Indian Economy

Editor, TRANSFIN.
May 8, 2020 8:44 AM 6 min read
Editorial

India may have a teetotalist reputation but alcohol is more important to the Indian economy than you may realise.

This was evident in the past few days, when a few parts of the country saw COVID-19 lockdown restrictions being eased and liquor shops reopen. The response was staggering, to say the least - a torrent of consumers thronged liquor stores, queueing in endless lines to purchase the beverage of their choice. (And voiding social distancing norms while at it.)

Meanwhile, some states moved to hike the price of liquor across categories. Delhi announced a “special corona fee” of 70%. Andhra Pradesh cleared two successive hikes of 25% and 50%. Other states like Punjab and Karnataka are mulling special alcohol levies of their own.

So how important are liquor sales to the Indian economy? Why have states been extremely eager to see liquor shops reopen? And what is the future of alcohol in post-COVID India?

 

Where Do States Earn their Revenue From?

Alcohol’s importance stems from its hefty contribution to states’ coffers. (FYI: All states and Union Territories permit the sale of alcohol except Gujarat and Bihar, which have imposed prohibition). 

Let’s back up a bit and note that states need revenue to keep things going. And they procure revenue, broadly speaking, from (1) tax sources and (2) non-tax sources. 

The former is further divided into the state’s “Own Tax Revenue” and its share in central taxes. 

Own Tax Revenue in turn comes from three main sources:

  1. Taxes on Income & Expenditure (such as Agricultural Income), 
  2. Taxes on Property and Capital Transactions (such as Land Revenue, Stamps & Registration etc), and 
  3. Taxes on commodities and services (such as Sales Tax etc).

Why Liquor Matters: How Much Do States Earn From Liquor Sales?

Alcohol, as you might have guessed, is a commodity that is taxed like any other. But it is also a particularly widely bought commodity, with per capita consumption having grown by 38% between 2010 and 2017 and currently growing at a lofty 8%+ CAGR.

Thus, it adds a considerable amount to states’ exchequers. (This is why states fought tooth and nail to keep alcohol out of the purview of GST.)

Generally, states levy various taxes on the manufacture, distribution and sale of liquor. The most common of these taxes include the excise duty, transport fee, and label and brand registration charges. There are also various special fees like surcharges on imported liquor, value added tax (VAT) in some states and “special duties” like UP’s which is used for funds to maintain stray cattle.

According to the RBI’s September 2019 report on “State Finances: A Study of Budgets of 2019-20”, excise duty on alcohol accounts for 10-15% of Own Tax Revenue for a majority of states. In most, it is the second or third largest contributor to Own Tax Revenue: only SGST and fuel levies feature higher.

As per a study by Indian Ratings & Research, some states earn as much as ₹700cr ($93m) every day through the sale of liquor. The share of alcohol in state revenue is over 20% in no less than five states, 15-20% for seven states, and 10-15% for three States.

For some perspective, and just to drive the point home, here’s just how much the top five states earned as excise duty from liquor in 2019-20:

 

Alcohol Revenue by States
Top 5 States by Revenue Earned from Liquor Sales.

 

So far, so good, right? States need revenue and alcohol is a rich source of revenue. Ergo, alcohol is important for the economy. 

Enter, COVID-19

The amount collected in liquor levies has been increasing constantly over the years, and this trend was expected to continue in 2020-21. But then the coronavirus hit Indian shores, all business prediction models were blown out of the water, India imposed the world’s largest lockdown, and here we are.

Nearly 40 days into the nationwide lockdown, the Central Government said restrictions would be eased in less-affected parts of the country. 

Reopening liquor shops was something states have been lobbying the centre to do ever since the lockdown commenced on March 25th. In Lockdown 3.0 (or Reopening 1.0, whichever way you see it), it was announced that these shops could be opened provided they were not in containment zones and were standalone stores. 

 

 

States Impose Special Taxes on Alcohol: Why Liquor Sales are Important for the Indian Economy
Some states earn as much as ₹700cr ($93m) every day through the sale of liquor. The share of alcohol in state revenue is over 20% in no less than five states, 15-20% for seven states, and 10-15% for three States.

 

Over 70,000 liquor shops were duly opened as per guidelines. (Mumbai reversed this decision after too many people gathered outside stores, and many shops in Delhi were forced to shut down on Day One to dispel crowds.)

Meanwhile, liquor vendors reported record sales. In Karnataka, on Tuesday alone ₹197cr ($26.2m) worth of liquor was sold. In Maharashtra, West Bengal and Uttar Pradesh the figures were ₹62cr ($8.2m), ₹40cr ($5.3m) and ₹100cr ($13.3m) respectively.

The Way Forward: Home Delivery of Liquor?

There is no doubt about the fact that the lockdown devastated state revenue - they lost over ₹30,000cr ($3.9bn) because of the prohibition of the sale of liquor. States are also bracing for a steep fall in GST collections, a fall that could be as high as 90% in some cases.

Out of the three biggest contributors to state revenue, GST and fuel taxes are lost cause for now. Which leaves the third - liquor sales - as a viable source of revenue, and a means to cushion the coronavirus blow. This is why states are adding hefty new taxes of liquor sales - partly to control tippler crowds but also to generate revenue at a time when coffers are rapidly emptying.

But how do you ensure that liquor is sold in safe conditions and avoid seas of consumers lining up outside stores? 

One answer would be home-delivery. 

The Confederation of Indian Alcoholic Beverage Companies (CIABC) has urged state governments to allow home-delivery of alcoholic beverages. Food delivery giant Zomato, which ventured into grocery delivery during the lockdown, is also reportedly mulling alcohol delivery.

What Does the Law Say About Ordering Alcohol Online?

Currently, the regulatory landscape for alcohol e-commerce in India is ambiguous. In some states (Kerala), the idea was enacted, in others (Karnataka) it was put under consideration, and in many (Delhi, Maharashtra, Haryana etc.) startups exploring the idea were penalised by authorities. 

FYI: The production, transport, sale and taxation of alcohol are state subjects i.e. State legislators are empowered to make rules on this issue, not the Central Government.

Changing Tides: Time to Allow Home-Delivery of Liquor?

What we’ve understood so far: states need revenue, liquor can be a reliable source of revenue, but the physical sale of liquor can be hazardous, but online sale is not recognised by the law. 

Permitting food-tech cos to deliver alcohol would be a major change and it would be driven first and foremost at the legislative level. If adopted, several safeguards would have to be put in place - like ensuring the purchaser is not underage, penalising price gouging, discouraging hoarding etc. 

Alcohol home-delivery and e-commerce would be a considerable change, and in tune with the times. Even after the lockdown is eased throughout India, life won’t bounce back to normal overnight. People will have to follow social distancing norms for some time, contend with wearing protective equipment like face masks when they are outside, follow extra precautions when travelling by airplane etc. Ensuring that even alcohol, like many other commodities, can be bought safely online would be one more step in that direction.

FIN.

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