States' excise policy must optimise revenue, adopt clearer regulation

An optimal state policy must go beyond a revenue-hungry, punitive regulatory regime

To usher in 2026, alcohol consumption remained a centrepiece of festivities, with an estimated consumption of 12 to 15 million cases in India. In parallel, it took a near doubling of police deployment on the roads to bring about a 37 per cent drop in drunk-driving cases in Mumbai alone that night. 

Governance of alcohol — its manufacture, distribution, sale, and taxation — remains one of the most fraught areas of public policy, sitting at the intersection of public health, social morality, and fiscal necessity. For an Indian state, the challenge is perpetual and profound: How does one responsibly manage a commodity that is simultaneously a major source of revenue and causes significant social harm? 

The necessity for state intervention in the alcohol market begins with basic economics. Alcohol consumption is a classic case of negative externalities. The costs associated with consumption — public disorder, traffic accidents, domestic abuse, loss of productivity, and strain on public healthcare systems  — are borne not just by the consumer, but by society at large. The price paid by the consumer in the market, therefore, does not reflect the true social cost of the good. Left entirely to the market, there will inevitably be over-consumption, leading to suboptimal social outcomes. 

This foundational market failure calls for state intervention to internalise these social costs and mitigate the negative externalities. However, this imperative must be tempered by two considerations. 

First, alcohol is not in the category of goods like heroin that call for complete prohibition. Its consumption, in moderation, is a matter of personal choice in most societies. Hence, the public policy goal should be not to ban, but to secure informed and responsible consumption. 

Second, available limited state capacity must be judiciously deployed — for general law enforcement and ensuring public safety, supervising education, and healthcare. Therefore, the regulatory architecture for alcohol must be simple, efficient, and self-executing, relying more on price signals and structural controls and less on constant, intrusive surveillance.

 

The primary tools available to states to achieve informed and responsible consumption fall into two categories: Non-price regulation and taxation.

 

Non-price regulations aim to control the context and accessibility of consumption. These include setting a robust minimum age for consumption and implementing rigorous, community-participatory locational policies to protect vulnerable populations and sensitive public spaces.

 

However, taxation — excise duty — is where the real complexity lies. In India, the power to regulate and tax alcohol resides squarely with the states.

 

Across Indian states, excise duty has grown into a major revenue source especially post-good and services tax (2017). Its share in total own-tax revenue of states now ranges from negligible levels in prohibition states to as high as 30-35 per cent (Puducherry), with many larger states now in the 15-25 per cent range.

 

In terms of economic size, excise collections constitute close to zero in prohibition states but rise up to around 1.5-2 per cent of gross state domestic product (GSDP) in high-dependence states such as Chhattisgarh and Telangana. Most other states fall between 0.5 per cent and 1.2 per cent of GSDP. Importantly, this fiscal pattern marks a sharp increase over the last 7-8 years, as the introduction of GST significantly reduced the number of independent tax instruments available to states, resulting in a steady structural shift towards greater reliance on non-GST sources, especially alcohol excise to maintain revenue buoyancy.

 

This creates the fundamental policy conflict: The need to reduce negative externalities versus the financial pressure to maximise tax revenue. The principled answer lies in shifting the state’s objective from maximising revenue to optimising revenue. Optimisation means setting the tax rate not to fill a budget deficit, but to achieve a specific public policy outcome — internalising the negative externality.

 

The theoretically sound solution lies in applying the Pigouvian principle, namely to align the excise duty with the estimated economic value of the negative externality from alcohol consumption. Research and international best practices demonstrate that the most effective way to implement this is by fixing excise duty in direct proportion to the alcohol content of the beverage. This moves away from the confusing and arbitrary taxation based on the price of the beverage or category, and targets the source of the social risk — the ethanol itself. A high-alcohol spirit is taxed proportionally higher than a low-alcohol beer, creating a clear price signal that encourages consumers to choose beverages with lower alcohol content, thereby promoting responsible consumption.

 

Available evidence clearly demonstrates that India’s current excise taxation structure is inverted, with lower-alcohol beverages taxed more heavily than higher-alcohol spirits when measured per unit of ethanol. On an average, beer is taxed 30-70 per cent higher per unit ethanol than whisky, reinforcing the argument that India’s current alcohol taxation regime does not follow a harm-based or alcohol-content framework; instead, it structurally penalises lower-strength beverages while comparatively favouring higher-strength spirits.

 

Beyond taxation, the regulatory framework must be streamlined to ease compliance and improve consumer safety. The safety and standards of alcoholic beverages are already within the purview of the Food Safety and Standards Authority of India (FSSAI). State governments should align their production regulations with these established FSSAI standards. This alignment would allow for joint enforcement mechanisms, significantly easing the compliance burden on the industry, which currently faces overlapping and often conflicting demands from multiple state departments and central bodies.

 

Going forward, the new regulatory and taxation framework should, therefore, consist of five integrated elements:

 

1. The tax structure must be based solely on alcohol content in beverages.

 

2. Complete alignment with FSSAI standards for safety and quality.

 

3. Strict enforcement of locational norms (away from educational/religious sites) and minimum drinking age.

 

4. Easing and removal of all other arbitrary restrictions (like licence caps or production limits) to allow the market to determine efficient production and distribution.

 

5. The State steps back from acting as a revenue maximiser and focuses exclusively on its appropriate role as a regulator and guardian of public health.

 

By transitioning from a revenue-hungry, punitive regulatory regime to a principled framework that leverages optimal taxation and clear, targeted regulation, states can better reconcile their competing public interests.

 

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The author is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant