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Business News/ News / India/  Will alcohol walk the tobacco tax path in times of covid-19?
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Will alcohol walk the tobacco tax path in times of covid-19?

Haryana also plans to levy a special covid cess even as stores largely remained shut on Monday due to licence issues
  • The Delhi government's move may affect the state's liquor sales once inter-state movement is allowed.
  • Delhi government has announced a 70% special corona fee on alcohol. Photo: MintPremium
    Delhi government has announced a 70% special corona fee on alcohol. Photo: Mint

    NEW DELHI: With state finances dwindling, the Aam Aadmi Party-led Delhi government late Monday announced a 70% special corona fee on alcohol. The decision was also spurred by the huge rush at alcohol stores which opened for the first time since the lockdown was announced.

    Delhi's neighbouring state Haryana also plans to levy a special covid cess even as stores largely remained shut on Monday due to licence issues. The special cess could create arbitrage opportunity with other states like Uttar Pradesh which are yet to levy such a cess.

    India has been under a lockdown since 25 March and stores selling liquor and tobacco have also been shut since then. Income from liquor cess is a key source of income for states. The Delhi government's move may affect the state's liquor sales once inter-state movement is allowed.

    State governments had lobbied hard to keep liquor and auto fuels like petrol and diesel out of Goods and Service Tax (GST) so that it becomes easier for them to boost revenue collections when needed.

    In 2018, the Kerala government raised excise duty on liquor to finance humanitarian work after the state faced the worst floods in about a century. Since liquor is out of GST, the central government’s taxation on the alcoholic beverages industry is limited to customs duty on import of concentrate and the taxes on corporate profits and dividends issued by producers.

    Delhi’s desperation for funds was evident when deputy chief minister Manish Sisodia on 4 April wrote to union finance minister Nirmala Sitharaman saying the state did not get any allocation from the 17,287 crore the Centre distributed to states as disaster relief funds even as the state had been tirelessly working to fight the pandemic. The Centre clarified that the funds were given to states as per the Fifteenth Finance Commission’s formula and not to Union Territories like Delhi and Puducherry which have the option to tap the NDRF managed by the home ministry for their fund requirements.

    Utility of goods has been a key criteria guiding indirect tax policies of central and state governments. Thus, polluting fossil fuels like petrol and diesel, cars with high displacement engines considered a luxury and sin goods like liquor and cancer causing tobacco have attracted high taxes. Sports utility vehicles, tobacco and aerated drinks are on the highest GST slab of 28 %, which also attract a cess. Liquor, which is outside GST, is subjected to state excise duties heavily.

    The liquor industry contributes about 2.5 trillion a year to state governments by way of excise duty and in some states as value added tax, according to an industry executive. Bulk of their tax outgo goes to state governments as liquor is a state subject.

    The financial health of states, which was already deteriorating due to the economic slowdown, worsened due to the national lockdown, which brought the economy to a grinding halt. Many state finance ministers have said the coronavirus crisis is rattling their economies as revenue gaps, borrowing limits and the risk of falling fund transfers from the central government make them helpless amid the pandemic.

    Punjab finance minister Manpreet Singh Badal had cautioned at a webinar hosted by the Gulati Institute of Finance and Taxation (GIFT) in Kerala last Monday that the combined fiscal deficit of central and state governments this financial year could touch 10% of GDP without making any extra spending to fight back the pandemic, due to the fall in economic activity.

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    ABOUT THE AUTHOR
    Gireesh Chandra Prasad
    Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 05 May 2020, 10:15 AM IST
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