Alcohol gave ‘high’ to States’ own tax revenue

Liquor has not only given a ‘high kick’ to the political debate, but has also helped states and union territories (along with legislatures) improve their own tax revenue (SOTR) income. In-depth finance data for states/UTs, revenue from state excise duty (which is mainly levied on liquor) is projected to increase by over 34 per cent between FY 2019-20 and 2021-22.

Though all regions registered growth, the south saw higher growth mainly due to Andhra Pradesh. There was good growth in the northern region as well as in the central region, but prohibition in Gujarat and Bihar affected the average of the western region and eastern region. State-wise, Andhra Pradesh witnessed a growth of around 117 per cent, while Telangana registered a growth of around 42 per cent. Uttar Pradesh in the central region and West Bengal in the eastern region saw an increase of about 52 and 43 per cent, respectively.

No GST applicable

Liquor is the only consumer product that has been constitutionally deprived of the applicability of the Goods and Services Tax (GST). Although there is no condition for petrol, diesel, ATF, crude and natural gas, they are still outside the purview of GST.

This means that while the GST Council is empowered to recommend rates for over 1,200 goods and all services that are included in the negative list, states and union territories are free to revise the levy on liquor for human consumption. Huh. Since it is a demerit good, a high levy does not invite suffering from the public, although any such move encourages drunkenness and leads to tragedy. However, this does not discourage the States/UTs to increase the levy.

In fact, soon after the Covid-led lockdown ended in May 2020, liquor gave some rest to the state’s finances as the respective governments increased fees to get funds for several relief activities.

At the time, a study by India Ratings and Research showed that 15 states get at least 10 percent of their earnings through a pool of state goods and services tax (SGST); VAT/sales tax on petrol, diesel and jet fuel; and stamp, registration and electricity duty. In fact, five states including Karnataka and Rajasthan account for more than 20 per cent of alcohol; 15-20 per cent for seven states including Uttar Pradesh, Punjab and Madhya Pradesh; and 10-15 per cent for the three states including Andhra Pradesh and Odisha.

On the back of the envelope calculations based on the estimated total income in a year and the number of dry days for sales, states and UTs earned between ₹600 crore and ₹650 crore during FY22. Apart from excise duty, states also collect license fee and permit fee, while the center collects only import duty on imported liquor.

The sources of revenue of the state government are SOTR (states own tax revenue), share in central taxes, SONTR (states own non-tax revenue) and grants from the Centre. On an average 45-46 per cent of revenue receipt is through SOTR. More than 90 per cent of SOTR is generated from five revenue heads – tax on property and capital transactions, state VAT, state excise, tax on conveyance and state goods and services tax.

Published on

21 August 2022


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