On the very day the government allowed the reopening of liquor shops in non-containment zones, the electronic, print and social media was abuzz with stories of people waiting in long queues to quench their thirst. In many places, the police had to get the shops closed due to the rush and social distancing not being followed.
As alcohol is under state jurisdiction, many states and Union Territories like Delhi, Haryana, and Telangana increased excise on alcoholic beverages by 10-70 percent. This move is going to benefit the states and many of them might able to make up for the loss of revenues due to Coronavirus lockdown through increased taxes.
Excise on alcoholic beverages already accounts for 20-25 percent of the states’ own taxes in most of the states (except dry ones) of the country; the increased excise might take this to above 30 percent.
The states with full or partial prohibition on alcoholic beverage consumption will come out as the real loser in the game. In India, five states- Gujarat, Bihar, Mizoram, Lakshadweep, and Nagaland are going to pay a heavy price for imposing prohibition on alcohol consumption. Andhra Pradesh, where the newly elected YSRCP government imposed partial prohibition, would also feel the heat.
In the last few years, the states have become increasingly dependent on alcohol and petroleum tax for their own revenue. “Liquor provides 20 per cent of the share of the government’s own revenue in most States,” says Jose Sebastian, associate professor at Gulati Institute of Finance and Taxation, Thiruvananthapuram.
Moreover, this year the revenue from the divisible pool of direct taxes is going to be very low given the fact that companies are not in a position to pay corporate tax and collection from Income tax is also poised to drop. The grant from the central government, which makes a significant part of revenues for states like UP and Bihar, is supposed to drop as the central government will be experiencing a fund crunch.
The State GST collection would also drop as consumption in the country touches historic low. In such a situation, the states would be dependent on revenues from Petroleum and Alcohol. As economic activities slow down, the consumption of petroleum would also dip, and therefore, the increase in taxes on petrol and diesel would compensate only for reduced demand.
Therefore, the best source of revenue for all states is excise on alcohol. Given the long queues on shops despite increased taxes, one can predict that it is very unlikely that the demand for alcoholic beverages is going to come down despite economic slowdown.
In such a situation, two of the biggest losers would be Gujarat and Bihar. The Northeastern states are very small and given their grim situation, the central government would to be forced to not cut their grants much. Andhra, which has imposed only partial prohibition, would feel little heat too, but Bihar and Gujarat are going to starve for funds.
Every year, Gujarat loses revenue worth around 20,000 crore rupees and Bihar loses around 10,000 rupees due to prohibition. This year, they could have increase revenue by 50 percent by imposing extra taxes, but thanks to their prohibition policy, not a single penny would come to their coffers.
Both states have budgeted expenditure of more than 2 lakh crore rupees and they would be forced to borrow at high-interest rate to meet the committed expenditure.