Taxing Liquor For Revenues

The Maharashtra governments recent decision to raise the excise duty to 200 per cent on the manufacturing cost of liquor brands and 100 per cent on beer brands can be seen in that light.

To add salt to the injury, the state government also came up with some fairly novel suggestions for making the distillers and brewers pay more. One thing being considered is restricting the maximum retail price of alcoholic beverages to four times the manufacturing cost. In essence, the government seems concerned with the fact that while it is okay for them to collect higher revenues through a hike in duties, it is not fair for the manufacturers to make profits by jacking up prices and margins.

 

Not that the manufacturers of liquor and beer were considering hiking prices anyway. The structure of the excise duty is ad valoremthat is, the duties increase in proportion to the value addition to the product. This has most of the premium and Indian made foreign liquor (IMFL) producers up in arms.

They point out that while on the surface the duty hike is the same for both IMFL as well as country liquor, the ad valorem structure ensures that premium brands attract a higher duty than lower priced or cheaper brands. And they fear that this sort of hikes would make sure that people shift from the better brands to the cheaper brands in a bid to keep their budgets balanced.

Besides, they feel the steps will actually lower revenue for the state government rather than make it higher.

The reason for this is that a large proportion of liquor manufactured in the state finds its way to ostensibly dry states like Gujarat and Andhra Pradesh. If prices in Maharashtra become too high, the people in these states might start sourcing their liquor from other cheaper states.

In fact, considering all these factors, some companies, like United Distilleries for example, are planning to shift their manufacturing base from the state.

As far as the consumer is concerned, his favourite brands are certainly going to taste a bit bitter after the hike. Most brands will see their retail prices go up by 40 to 50 per cent. Prices of premium brands like Royal Challenge, Smirnoff, which are now priced at Rs 280, will be selling at Rs 500, whereas deluxe brands like Antiquity and Heritage, which have a price tag of Rs 400, will now be sold at Rs 800.

In fact, one can envisage all sorts of steps by liquor manufacturers to get around the hike. For example, a premium brand will be shown as inferior brand for the purpose of excise records. This will enrich the excise officials and the percentage of cash sales will go up.

The other method that could be adopted is that of issuing bills for lower ended whiskey while selling higher-end brand. Again the beneficiary will be the excise officials.