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Liquor may become cheaper if states agree to a common tax

Liquor may become cheaper if states agree to a common tax
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First Published: Tue, Jun 02 2009. 12 17 AM IST

Working to a deadline: Companies have tended to sacrifice efficiency to sidestep taxes under the current structure, resulting in high costs. This may change with the introduction of the goods and serv
Working to a deadline: Companies have tended to sacrifice efficiency to sidestep taxes under the current structure, resulting in high costs. This may change with the introduction of the goods and serv
Updated: Tue, Jun 02 2009. 12 17 AM IST
New Delhi: Alcohol is likely to be cheaper following the introduction of the goods and services tax (GST), which proposes to radically change India’s indirect taxation.
Today, tax on alcohol is the exclusive domain of the states. Consequently, taxes on liquor vary widely between states and a brewery or distillery that sources inputs from another state ends up paying relatively higher taxes on its final product as taxes already paid on inputs are not allowed to be offset from the tax on the final product.
Working to a deadline: Companies have tended to sacrifice efficiency to sidestep taxes under the current structure, resulting in high costs. This may change with the introduction of the goods and services tax. Ramesh Pathania / Mint
This situation may change following GST’s introduction, and the tax structure may be designed to allow companies to follow a business model where it does not discourage them from sourcing inputs and locating production units in the best available locations within India.
The ongoing negotiations on GST between the Centre and states aim to enhance economic integration across states currently fragmented in terms of taxation policies.
The fragmentation has led to suboptimal economic decisions by companies as efficiency is sacrificed to sidestep taxes—resulting in high costs. Currently, the Centre and states are working on 1 April deadline to introduce GST.
According to a senior official in the finance ministry who didn’t want to be identified, an alternative to the current situation of only states having the power to tax alcohol is on the negotiating table.
The alternative scenario envisages a common tax across the country on alcohol, with both the Centre and each state being given the right to levy an additional tax over the common rate, the official added.
The states will be given the right to levy an additional tax on alcohol as tax on the product today forms a significant amount of revenue for some states, and they may have to be granted the right to levy tax—to raise extra resources from alcohol—so as to agree to cede exclusive control on taxing it. According to some independent experts on GST, the scenario of a common tax across India on alcohol is plausible.
“I see this as a realistic possibility because it seems to address the concern of states,” S. Madhavan, executive director of tax and regulatory services at PricewaterhouseCoopers, said. “My sense is there is a good enough consensus towards ensuring GST does include alcohol,” he added.
Even if some states opt to levy their own tax on alcohol over and above the common rate, it would be an improvement, experts said. Alcohol companies can offset taxes paid on inputs sourced across the country from the tax on the final product.
“With input tax credit, you remove distortions. You don’t break the supply chain for alcohol,” Satya Poddar, partner at Ernst and Young, who has advised some states on the transition to GST, said.
During the early phase of negotiations on GST, finance ministry officials said, the states were not keen on bringing alcohol into the GST net as the product is an important revenue generator.
The revenue to all states from alcohol was not available in the Reserve Bank of India’s latest study of budgets.
According to some independent experts on GST, the alcohol industry is often linked to the murkier aspects of funding political parties. GST should neutralize this dimension, they said. “GST will bring a lot more transparency in alcohol which will benefit the economy as a whole,” Poddar said.
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First Published: Tue, Jun 02 2009. 12 17 AM IST