Why Alcohol is So Important for State Revenues : Daily Current Affairs

Date: 01/03/2023

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Seventh Schedule, Lieutenant Governor of Delhi, value-added tax (VAT), Direct taxes, interest and dividends, special duty on liquor, waivers to the liquor.

Context:

Recently, the Deputy Chief Minister of Delhi was arrested by the Central Bureau of Investigation in relation to the now-revoked New Excise Policy 2021-22.

Key Highlights:

The Delhi government introduced the new policy in November 2021, based on an expert committee report.
Pursuant to the new policy, the sale of liquor was handed over to private licence holders while the government withdrew from this activity.
It was reported that after the implementation of the policy, the government’s revenue increased by 27 per cent, generating around Rs 8,900 crore.
Subsequently, in July 2022, the Chief Secretary reported irregularities and procedural lapses in the policy to the Lieutenant Governor of Delhi.
The allegations in this report and in the FIRs mention undue favours to liquor licencees in lieu of commissions, such as waivers to the liquor cartel on the tendered licence fee.
Further, allegedly, changes were introduced in the policy without the approval of the competent authority.
It has been alleged that such actions led to the loss of revenue to the state.

Do you Know?

Under the Seventh Schedule of the Indian Constitution, excise duty on alcoholic liquors meant for human consumption is covered under Entry 51 of List II, that is, the State List.
Since 1977, the share of state general revenue from intergovernmental transfers, as well as charges and user fees, has increased, while the share from taxes has declined.
Revenue from charges, user fees, and miscellaneous sources increased significantly from 11 percent in 1977 to 18 percent in 2002, as states sought to increase revenue from non-tax sources, including large increases in public university tuition.
Charges as a percentage of revenue have been fairly flat since 2002, however

Why alcohol is so important for State Revenues?

The manufacture and sale of alcohol are one of the major sources of “own tax revenue” for the states, with the exception of Gujarat and Bihar, which have prohibited alcohol consumption.
RBI’s report titled ‘State Finances: A Study of Budgets of 2019-20’, analysed the excise duty on alcohol in states and reported that it accounts for around 10-15 per cent of the own tax revenue of a majority of states.
This estimate was computed without taking into account the value-added tax (VAT) and any fees for stamping, weights and measures applicable to alcohol.
Accordingly, the actual collections from the manufacture and sale of alcohol were probably higher.
In financial year 2022, the aggregate collection of all states from the state excises amounted to Rs 2,05,363 crore, up from a collection of Rs 1,72,794 crore in FY 2021.
Different states adopt different approaches to taxation on alcohol. While most states levy excise duty on the manufacture and sale of liquor, some like Tamil Nadu also impose VAT.
Uttar Pradesh does not levy VAT but has imposed a “special duty on liquor” to collect funds for special purposes, such as the maintenance of stray cattle.
During the pandemic, states were relying on covering the increased expenditure from their earnings from the sale of alcohol.
The RBI State Finances report for 2022-23 also highlights that the state’s revenue collections declined in 2020-21 on account of the pandemic-induced slump, their excise collections increased due to an increase in duties on alcohol.
Alcoholic liquor has been expressly excluded from the purview of GST laws.
One reason for the non-applicability of GST was to ensure that states’ revenues from the sale of liquor were not affected.

Various Income Sources of Government

The government’s primary source of earning money is from taxes and non-tax revenues.
Taxes are collected in the form of direct and indirect ways.
Direct taxes include income tax, real property tax, personal property tax, or taxes on assets; while some of the indirect tax modes include GST, customs duty and tax deducted at source (TDS).
On the other hand, non-tax revenue is the recurring income earned by the government from sources other than taxes.
The top receipts under this are interest and dividends and profits received from public sector companies.

Conclusion:

Sale of alcohol is one of the easiest ways for individual states to generate revenues, given the other transactions in goods and services as well as public and private transport will stay limited.
However, steps should be taken to reduce its consumption in every way possible considering its bad impact on health and society as a whole.

Source: The Indian Express

Mains Question:

Q. What are various sources of revenue for the government? Why alcohol is so important for State Revenues? (250 words).