On Sunday, Telangana Chief Minister K Chandrasekhar Rao announced that the government will waive off Rs 24,000 crore worth crop loans of farmers in a phased manner. Last month, the newly-formed Congress governments in Madhya Pradesh, Chhattisgarh, and Rajasthan announced major farm loan waivers, and the BJP government in Assam was quick to follow suit. So far, the promised farm relief reportedly totals Rs 1.75 lakh crore.
With such populist decisions likely to gain significance in the run-up to the forthcoming next general elections, aggregate fiscal deficit of the states is expected to reach 3.2% in financial year 2020, warns a recent report by India Ratings. And, in the bargain, the country's alcohol business is likely to take a hit. According to Bloomberg, in an attempt to plug this fiscal hole, states are expected to hike taxes on liquor, one of the top three revenue sources.
"Raising liquor taxes - which bring in nearly 25% of revenue - is the most likely option as state governments are unlikely to borrow and worsen their debt-to-GDP ratios," Abneesh Roy and Alok Shah, analysts at Edelweiss Securities Ltd wrote in a recent investor note.
But any increase in taxes will have an adverse effect on alcohol demand as liquor companies are sure to pass on the buck to customers. "In the past, there have been multiple instances where volumes have taken a beating owing to price hikes emanating from an increase in the tax rate," the note added.
Maharashtra has already taken a step in this direction. The Devendra Fadnavis government earlier this month increased the excise duty on Indian-made foreign liquor by 20%, and the buzz is that it will help fetch additional revenue of Rs 2,000-2,500 crore. Last year, too, several states had hiked up taxes on alcohol. For instance, Gujarat had tripled the excise duty on alcohol while Kerala had announced a hike of up to 210% on liquor. Karnataka, meanwhile, announced an excise duty hike by 8% on liquor, after upping the additional excise duty on it to 21% in the previous budget. According to IndiaFilings, it is estimated that the taxes on beer and liquor fetch state governments around Rs 90,000 crore in taxes each year.
That is the main reason why alcohol is out of the GST net, despite being a "sin good". For the record, a sin tax is levied on items that are harmful or costly to society, like tobacco. The idea behind this tax is to provide a revenue source to governments while deterring consumption of such items by keeping prices high.
While alcohol has been kept out of the new tax regime, the input raw materials used in manufacturing liquor do incur GST. This used to be taxed at around 12-15% under various VAT regimes previously, but under GST the tax incurred on most of the raw material stands at 18%. Also, the GST applicable on freight and transportation charges is higher than under the previous tax regime. Due to these factors, alcohol prices went up after the introduction of GST, and continue to rise year-on-year.
NITI Aayog's recent proposals could further push up taxes on liquor, if approved. Last month, the government think-tank proposed hiking taxes on alcohol, tobacco and unhealthy beverages in its 'Strategy for New India @75' document, which outlines clear policy objectives till 2023.
Sushmita Choudhury Agarwal with PTI inputs