Beer necessities

Reports indicate that the government is considering a revamp of the tax on beer. Alcohol taxation is, of course, exclusively in the domain of state governments and the Centre can, at best, provide guidance to them on efficient ways of doing it. Nevertheless, given the enormous complexity that alcohol taxes have developed in most states, not to mention the wide disparities in the rates that prevail, even between neighbouring states, good guidance, perhaps coupled with some tangible incentives, is necessary to both rationalise and harmonise tax structures across states. Even without giving up their powers to tax alcohol, state governments need to be persuaded that a rational and harmonised system based on voluntary compliance will be to the benefit of their own finances and the consumer.

What is a "rational" system of alcohol taxation? Essentially, it is one that reconciles the dual, but conflicting, objectives of maximising government revenues and minimising alcohol consumption. A practical way to achieve this is to impose a specific tax on the alcohol content rather than the beverage in which it is delivered to the consumer. In this scheme, beer, the beverage with the lowest alcohol content (below 5 per cent in most varieties) would face the lowest tax incidence, while the "hard" liquor varieties, which have about 43 per cent alcohol in India, would face the highest burden. Wine would fall somewhere in between. On the assumption that most consumers are price-sensitive, this structure would induce higher consumption of beverages with lower alcohol content, viz. beer and wine. This fulfils the objective of reducing "alcohol" consumption. Within these broad constraints, the tax rates for each category of alcohol can be set at levels that will yield the maximum revenue, given the price-sensitivity of consumers.

Although the notion of specificity is at the core of alcohol tax systems in the country, multiple layers have been added to it to bring it to its current state of complexity and disparity. Most state governments have been driven by short-term revenue considerations and imposed any number of additional levies on one or more categories of beverages. As a result, the desired proportionality between alcohol content and tax incidence has been generally violated. Beer, the beverage that would be most attractive from a price viewpoint, has typically been burdened by a tax that makes it the most expensive beverage on an alcohol volume-for-volume basis. Relatively low-quality varieties of hard liquor are among the most popular categories. Apart from the impact on consumption, the disparities in rates across states open up lucrative arbitrage opportunities for inter-state movement of alcohol, resulting in revenue losses for both the producing and the consuming states.

There is, thus, a broader argument in favour of both rationalisation and harmonisation. However, resistance from states can be expected because some of them may suffer revenue losses in the short term, something they can ill afford in this milieu of fiscal discipline. It is for the Centre to demonstrate to them the long-term benefits of moving towards an ideal type of structure, of which significant reduction in the duties on beer is a critical component, and simultaneously devise a mechanism that helps offset short-term losses. It is very likely that the revenue increase that comes from the elimination of arbitrage opportunities will obviate the need for such a mechanism, but re-assurance always helps.