Home / News / India /  As states’ income dries up, alcohol sales offer relief

Images of long queues outside liquor shops with people not practising social distancing have surfaced as the country entered the third phase of the lockdown to tackle the covid-19 pandemic. How does opening up liquor shops impact states? Mint explains.

How is excise duty levied and collected?

Excise duty is an indirect tax levied by the government on goods manufactured within India, and compares with custom duty, which is levied on imported items. Excise duty refers to the tax amount included in the final selling price of an item. As such, a consumer pays the excise duty while making a purchase. This money reaches the government through retailers. The tax needs to be paid by people while taking delivery of goods from a warehouse or production point for selling them. As excise duty is a tax on the manufacture of goods, the goods do not have to be sold for the excise duty to be collected.

Who levies the excise duty on liquor?

The excise duty on liquor is levied by the respective state governments in India. The 29 states and Union territories have adopted different approaches to regulate and tax the manufacture of liquor. Besides excise, states such as Uttar Pradesh impose a special duty on liquor to collect funds for special purposes, which raises the price even more. State excise duty on alcohol is the second or third largest contributor to the own tax revenue of states. It accounts for 10-15% of the tax receipts for a majority of the states. Licences to sell alcohol, fines and confiscation of alcoholic products also add to the exchequer of states.

Graphic: Santosh Sharma/Mint
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Graphic: Santosh Sharma/Mint

Does alcohol not come within the purview of GST?

Alcohol is not within the purview of the goods and services tax (GST). Exempting alcohol from GST was a key request put forth by state governments when the tax reform was being implemented across the country. Other major items that are beyond the ambit of GST are land, electricity and petroleum products such as petrol, diesel and aviation turbine fuel.

Why are states eager to open liquor shops?

Manufacture and sale of liquor are major sources of revenue for states. A ban on alcohol sales was a crucial part of the lockdown, but it deprived states of critical revenue. States’ GST collections have been low due to the pandemic. The loss has hit them hard as it came at a time when they had to incur extra costs of treating covid-19 patients and support the poor and vulnerable sections of society through the course of an economic shutdown. The reopening of liquor shops will help states meet their expenses to some extent.

What is their income from excise on liquor?

The 29 states and Union territories collected a total of 1.76 trillion through excise duty on liquor in 2019-20. This is 16.5% higher than the collection in 2018-19. The average monthly collection in 2019-20 was 15,000 crore, says the Reserve Bank of India; the pre-coronavirus projection for 2020-21 was even higher. After incurring high losses due to the pandemic, states such as Delhi and Andhra Pradesh are levying 70-75% additional fee on liquor purchases.

Jhoomar Mehta is a Delhi-based development finance consultant.

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