Lockdown 3.0: States look for a revenue high from liquor as tipplers make a beeline

As the liquor stores opened their shutters on Monday all over the country after 40 days of lockdown, crowds of tipplers surged outside the shops. It was the first day of the third phase of coronavirus lockdown, during which the government has given additional relaxations.

The large crowds, mostly flouting social distancing protocol, did not go down well with the authorities fighting Covid-19 outbreak but the huge turnout of parched buyers brought visible cheer in states’ revenue departments. The states are practically starving of funds due to dried up economic activities during the first two phases of coronavirus lockdown.

After struggling to control the crowds and queues, state governments indicated why sale of liquor is crucial for their coffers and how brews fuel their economies. Within one day of resuming operations, states started using tipplers’ day-out to gain a high on the revenue front.

Delhi’s Arvind Kejriwal government took the opening up as a window of opportunity by announcing on Monday evening a 70 per cent hike in the prices of liquor across categories starting Tuesday. Delhi chose to call it the “special corona fee” on alcohol.

Down south, the Andhra Pradesh government increased liquor prices in the state for the second time in three days. On Monday night, it cleared a 50 per cent hike on MRP, following a 25 per cent hike on Sunday.

Sources said Punjab, one of the highest per capita consumers of liquor, is actively considering a “special corona charge” on liquor for a specified period to rake in more revenue.

HOW CRUCIAL IS LIQUOR SALE FOR STATES

All states and Union Territories except Gujarat and Bihar — both of which have enforced prohibition — had been clamouring for a quick end to the shutters down rule for liquor shops ever since the first phase of national lockdown was announced. Liquor helps states earn more and revenue from liquor as a commodity doesn’t come solely from what is sold.

VAT (value-added tax) levied on liquor by states like Tamil Nadu, special fee charged on imported foreign liquor, transportation of liquor and registration of liquor brands etc are the secondary sources of revenue from alcohol.

Revenue receipts from state excise come mainly from commodities such as Country Spirits; Country Fermented Liquors; Malt Liquor; Liquor; Foreign Liquors and Spirits; Commercial and Denatured Spirits and Medicated Wines; Medicinal and Toilet Preparations containing Alcohol, Opium etc; Opium, Hemp and other Drugs; Indian Made Foreign Liquors; Spirits, and Sales to Canteen Stores Depots. Besides this a substantial amount comes from licences, fine and confiscation of alcohol products.

A by Fitch Group company and a research firm, Indian Ratings & Research (Ind-Ra) assesses that share of alcohol in the earnings of states is more than 20 per cent for five states including Karnataka and Rajasthan.

States such as Uttar Pradesh, Punjab, Madhya Pradesh and four other states earn 15-20 per cent from liquor and three states including Andhra Pradesh and Odisha earn 10-15 per cent. In the case of states, liquor sale is part of pool comprising of State Goods & Services Tax (SGST), VAT/Sales Tax on Petrol-Diesel-Jet Fuel, Stamp and Registration and Electricity Duty.

The ‘State Finances: A Study of Budgets of 2019-20′ report of the Reserve Bank of India published in September 2019 clearly indicates that that state levies on alcohol make up, on an average, 10-15 per cent of states’ own tax earnings for majority of states. This makes liquor levies the second largest contributor to states exchequer.

The sources of revenue for state government are SOTR (States’ Own Tax Revenue), share in central taxes as per finance commission’s recommendations, SONTR (States’ own Non-Tax Revenue) and grants from centre.

The average share (FY18 to FY20 BE) of SOTR in revenue receipts is around 46 per cent and it is the same for share in central taxes. On the other hand, SONTR and grants are 26 per cent, while 6 per cent and 20 per cent respectively.

In fact, a whopping 90 per cent of SOTR is generated from five revenue heads — state VAT (mainly petroleum products, 21.5 per cent), taxes on property and capital transactions (11.2 per cent), state excise (mainly liquor, 11.9 per cent), tax on vehicle (5.7 per cent) and state goods and services tax (39.9 per cent).

During the lockdown period, SOTR has declined significantly, barring some sale of petroleum products and state goods and services tax on non-discretionary spending.

So crucial are alcohol and petroleum for their revenue that states fought tooth and nail with the central government to keep both the items out of the ambit of GST.

Customer carry liquor bottles after purchasing from a wine shop on the first day of the third phase of coronavirus lockdown as alcohol beverage stores opened after 40 days on May 4. (Photo: PTI)

Liquor revenue depends on volumes sold. That’s why a state like UP with low per capita consumption of liquor (due to lower per capita income levels) rake in high revenue from sales. In 2019, UP made a kill worth Rs 25,000 crore from liquor.

Among other states earning good revenue from alcohol are Karnataka (Rs 19,750 crore), Maharashtra (Rs 15,343.08 crore), West Bengal (Rs 10,554.36 crore) and Telangana (Rs 10,313.68 crore).

Coincidentally, Uttar Pradesh, which has more than 25 large alcohol production units, freed liquor manufacturers from the lockdown a couple of weeks ago and asked them to start manufacturing alcohol-based hand sanitizers and commence building liquor stocks for the future.

There is a market logic behind this move by the UP government. Liquor is sold legally through government units or units, which win contracts from the government. Many states have an annual contract system which expires at the end of March and from April 1 new entities take over.

That’s why by the end of March stocks with the outlets are down to the lowest point for the year and replenished by April. But after lockdown was ordered on March 24, the stocking could not take place.

Experts say that the Monday rush at liquor stores was not just because of desperation among buyers but also because of low availability of stocks.

WHY STATES KEEP LIQUOR REVENUE

Seventh schedule of Indian Constitution lays down various items for Union List, State List and Concurrent List. Since states were clamouring for opening of liquor stores during lockdown, the central government in latest guidelines lifted the ban on opening of liquor shops in all zones (barring containment areas) with some riders to prevent revenue loss and leakage.

Based on the demands from the states, the Centre allowed sale of liquor by standalone shops with social distancing and presence of not more than five persons at shop.

However, opening of liquor shops in most states has been partial. For example, Delhi has allowed opening of only a few liquor shops, industry insiders say. Based on the consumption pattern, Delhi requires close to 3,000 outlets while the government allowed only 150 liquor shops out of 800 in national capital to sale liquors from Monday.

The Fitch Study says that the position of states’ revenue has weakened considerably. It says, “Increased ways and means advances are not very significant and can take care of liquidity issue.”

Fitch experts say, “The bigger problem for states is contraction in top line (revenue) of the states. Among state’s own tax earning, state excise (mainly liquor) is third largest source of state’s own tax revenue after SGST and state VAT (mainly petroleum products).”

The halt in economic activities has drastically reduced SGST and VAT earnings of states. That makes liquor the only option to provide some relief to state finances.

WHAT IS IN THE STORE?

The liquor manufacturers and sellers are relieved at the partial lifting of lockdown but aren’t really jumping with joy. They claim that April 2020 has been a washout.

A senior functionary with a liquor major said, “There will be no rise in liquor sales so growth prospects would be hurt. With too many restrictions on movement, new set of people would not get introduced to the list of liquor buyers or consumers. Additionally, malls, shops in market complexes and pubs are still shut. This along with the curbs on hospitality sector like hotels will continue to impact sales.”

A liquor shop owner in Noida said, “There are queues outside the shops. Don’t go by the rush outside shops. Many people are still not coming as they do not like the idea of being seen standing for liquor due to various social reasons.”