Huge tax and licence raj in liquor

Delhi Chief Minister Arvind Kejriwal and some other leaders are behind bars because of corruption charges against them in liquor policy for Delhi. This has understandably received much attention. However, this is missing the elephant in the room — the millions of consumers all over India who pay a very high price for liquor. Domestic tax on liquor can be, in one way or another, well above 200 per cent! Customs duty is also huge at 150 per cent. And, it is also the licence raj that is problematic. There is a need for an overhaul of policies on liquor across the country. It is true that there are vested interests that can come in the way. However, often vested interests thrive on the basis of the mindset of the public. So, it is important to see where the more important misconceptions lie.
 

A common belief is that state governments impose a very high tax on liquor in the public interest. This is not entirely correct. It is a very soft option to collect large tax revenues! Though a big tax can reduce the consumption of liquor to some extent, it is a blunt policy. It affects the budgets of many households for all things other than liquor. Now very many drinkers enjoy responsibly with friends and family every now and then. So why punish them? And, the licence requirements on serving liquor at eateries and social gatherings can be literally taxing, restrictive, and harassing. Also, as liquor becomes expensive due to very high taxes, people tend to very gradually and subconsciously shift to lower-quality and cheaper brands. At the bottom of the income pyramid, the consumption of low-quality country liquor and illegal liquor rises. This has an adverse impact on health.
 

Another common belief is that state governments just cannot do without a very high tax on liquor. This is not quite true. Even a poor state like Bihar has imposed prohibition on liquor. The point is not that this is a good policy; the point is that the state government is making attempts at managing its finances without any tax on liquor. There is a lesson here for other governments that too can explore other sources of revenues. Of course, it is important that the central government helps state governments in this endeavour. A beginning can be made if the Centre cuts down substantially on cess and surcharge, and it increases its regular taxes. The former accrues to the Centre only while the latter needs to be shared with the states.
 

Yet another widespread belief is that liquor cannot be brought under goods and services tax (GST). This is questionable if we allow for the possibility of a legislative change. If liquor is under GST, just as cigarettes are, this will also serve a larger purpose as this will unify and simplify the overall tax structure. The public authorities can charge the highest 28 per cent rate under GST. Of course, since part of the GST goes to the Centre, it is necessary that the latter compensates the states adequately.
 

Last but not the least, a common view is that instead of the state government itself having the monopoly to sell liquor through its own stores, it is better to conduct auctions to give licences to private companies to sell liquor. But wait a minute. While the regulation of consumption is understandable, it is not clear why there should also be any involvement of the government in the distribution of liquor. The distilleries can deal directly with private distributors or retailers. The good old market mechanism can be useful here as well. All that is needed is regulation like the minimum age for the consumer and no driving after drinking, and other steps like serious checks on spurious liquor. It also helps if the government provides funds to organisations like Alcoholics Anonymous.
 

Returning to auction of licences, in any case competition there often gets restricted in one way or another to participants who have “contacts”, muscle power, black money, etc, given the way the whole complex and non-transparent system operates. There are barriers to entry for an ordinary businessperson. And, online sales are not routinely allowed. Overall, the so-called competition is not very meaningful. And, all this vitiates the atmosphere for business, tourism, economy more generally, and even the polity.

In conclusion, the liquor policy in India has gone too far over time. There is a need to avoid huge taxes and undue licensing. All this can also reduce corruption and even doubts about corruption. Then, the limited state capacity, the media, and the electorate can be focused on more important matters.

The writer is an independent economist. He taught at Ashoka University, the Indian Statistical Institute (Delhi), and Jawaharlal Nehru University. He thanks Balesh Kumar for comments on the initial draft. 

gurbachan.arti@gmail.com and X: @gurbachan_econ