Higher tax on liquor to offset the revenue loss due to the pandemic seems to have backfired for states with sales down by almost a half in the first five months of the fiscal.
States that imposed a tax of 25% and above in the name of corona are likely to end up with lower tax revenue from liquor sales and also collect less tax per bottle with consumers seen down-trading, says Confederation of Indian Alcoholic Beverage Companies (CIABC), the representative body of leading Indian alcohol beverage companies.
State excise duty on alcohol accounts for around 10-15% of its own tax revenue for majority of states, according to RBI report on ‘State Finances: A Study of Budgets of 2019-20’.
Many states announced a hike in liquor tax in the name of ‘coronavirus cess’ soon after the lockdown in May. Delhi imposed a cess of 70% soon after the lockdown but later scaled it down.
Currently, Pudduchery, West Bengal , Andhra Pradesh, Jammu & Kashmir and Rajasthan have a tax of 25% more than what it was in March 2020.
Amar Sinha, CEO of Radico Khaitan, said, “Good consumer response in the first few days of opening up of liquor sales after long closure led some governments to incorrectly judge price elasticity of alcohol. They imposed tax increases as a quick way of increasing revenues. However, this has turned out to be counterproductive. With the increase in price, sales have fallen, more so where the increase is more”.
According to the data provided by the CIABC, sales of alcoholic beverages in states that imposed a tax increase of 25% or more is lower by 45% for the period of May-August, while sales for states that imposed no tax hike or marginal increase, it is only 12% lower year-on-year.
Interestingly, sales in 22 states that imposed no tax or a marginal tax are almost back to normal in August 2020 at just 1% lower year-on-year when compared to August 2019.
Vinod Giri,director-general of CIABC, said the notion that alcohol is not price sensitive is greatly misplaced.
“There is empirical evidence that price increases above 10% or so tend to start suppressing demand, causing fall in sales volume. Lower sales volume means lower total tax collection despite higher tax rate, thus defeating the whole purpose of tax increase,” he said, adding “it is also an established fact that with rising prices consumers tend to down-trade, hence the governments not only collect less tax due to fewer sales, they also collect less tax per bottle.”