A less complicated tax system will introduce transparency and, in fact, improve revenue generation
Despite the manifest efforts to subsume all the indirect taxes levied by the Centre and the State, it seems that there is no consensus among States when it comes to alcoholic beverages. The Constitution (One Hundred and Twenty Second Amendment) Bill, 2014, conferring concurrent taxing powers on the Union as well as the States was rolled out in December 2014 and approved in the Lok Sabha in May 2015.
It is significant to note that in spite of opposition by the States, petroleum and petroleum products have been subsumed in GST, but the only item sought to be excluded from the purview of GST is ‘alcoholic beverages’, wherein States shall retain the power to charge excise duty and VAT in the GST era as well.
It seems the States have been successful in their attempt to maintain control over taxability of alcoholic beverages. Alcohol revenue is a major contributor to State coffers. The liquor industry is the second largest contributor to State government exchequers, contributing more than ₹90,000 crore in taxes per annum.
However, socio-economic losses due to complexities in this ‘cash cow’ are immeasurable. For instance, the lack of uniformity in the regulations of different States makes it difficult for the manufacturer and seller to navigate through the complex system.
The multiplicity of taxes coupled with multiple tax events for applying various levies results in high incidence of tax on the final price.
The credit of various duties/taxes paid by the manufacturer is not available as a set-off from excise duty which adds to the cost of the manufacturer. The same is true for discharge of VAT liability, wherein the excise duty is not eligible for set-off. This leads to the tax cost being the major component of the final cost to the consumer.
Archaic procedures pertaining to licensing, movement of liquor from one State to another and also within the State, labelling requirements, and so on have created impediments in the natural growth of the industry to benefit the government, the manufacturer and the consumer.
The diverse regulations for an industry within the same country have led to several loopholes in the form of a thriving illicit liquor business and harmful cartels. A Ficci study carried out in 2012 indicated that nearly 10.2 per cent of the alcohol market in India is counterfeit. The economic consequences of the illicit liquor business are numerous and significant, leading to loss of revenue to the exchequer. A WHO report states that approximately 50 per cent of the alcohol consumed in India is produced illegally.
It seems the State governments’ dependence on alcohol revenue is proving unhealthy and exclusion from GST would only perpetuate the complexities that currently plague the industry.
GST is ideal to bring transparency in the sector by improving governance and compliance. There would be many benefits, too. For instance, the burden of tax cascading that has haunted the industry will be negated, resulting in healthy competition in domestic as well as international markets. The inclusion of alcoholic beverages would simplify as well as mitigate the regulatory issues associated with procedural aspects in the supply chain of the liquor industry. Enforcing simplified compliance and strengthening audit trails will make tax evasion difficult and yield more revenue.
The economic distortion caused due to varied taxes on alcohol can be removed by a comprehensive tax system, paving the way for an efficient and effective tax administration. GST will also substantially reduce illicit liquor and counterfeiting by establishing stringent controls on manufacture and movement.
A comparison of the perceived advantages of including alcoholic beverages within the ambit of GST on the one hand, and the ill effects of the existing indirect tax policy on the other, suggests that it would be prudent for States to concur in the larger interest of the country.
The role of indirect taxes is very important in context of ‘Make in India’. GST is purported to be the game-changer in this effort. The success of the proposed reform depends on its comprehensiveness.
In such a scenario, excluding the alcohol sector would be an opportunity lost for the government.
The writer is a senior director at Deloitte Touche Tohmatsu India Pvt Ltd. The views are personal