Why states are unwilling to take lessons from Delhi liquor excise saga

The controversy in Delhi reflects the enduring importance of this revenue source for state exchequers

This report has been updated to incorporate a clarification by the Madhya Pradesh government. Investigations into how liquor is sold in Delhi state has led to Deputy Chief Minister Manish Sisodia being raided by the Central Bureau of Investigation last week. Delhi’s lieutenant governor has transferred 12 state government officers for alleged graft.

In FY22, Delhi had changed its excise policy, claiming it would generate at least 15 per cent more revenue than the receipts of FY18 of Rs 6,309 crore. In the first quarter of FY23, the Delhi government claimed liquor revenue had risen by Rs 1,484 crore but this was disputed in leaked data on sales that noted that collections might be just about Rs 570 crore lower than those of FY18.
 
Yet, despite whatever changes occur in the policy subsequently, the lessons are unlikely to be applied by other states. This is because the business of selling liquor is so attractive that no state is willing to heed lessons from others. Many walk the extra mile to keep their policy including tax rates distinct from their neighbouring states, creating a logistical nightmare for India’s liquor manufacturers and distributors.
 
This is unlikely to change anytime soon because liquor taxes have been -- for decades – one of the major revenue earners for states after automobile fuel. Being outside the purview of the sharing formula of the Goods and Service Tax, it is a source that is zealously guarded. Revenues from liquor vary from 99 per cent of state’s total receipts (excluding the oil sector) for nine states — Delhi, Odisha, Maharashtra, Telangana, and Uttar Pradesh to 77 per cent for Madhya Pradesh.
 
As a result, the experience of dealing with 25 state governments and eight Union Territories where liquor is distributed in India is starkly variable. For instance, Jharkhand has deployed an extremely efficient information technology backbone for the excise department to respond to the liquor companies. This does not necessarily mean that input tax credits come promptly, a high-ranking official of a liquor company explained, “but licences for offering a new line of wine or hard liquor to the state citizens are cleared within days”. So also are the approvals for the size of the bottles in which those products can be sold.
 
Post-Covid-19, state governments such as Jharkhand and neighbouring West Bengal were among the first to have gone paperless in their dealings with the liquor trade. In fact, the detailed attention given to the business shows that states can easily improve service delivery for their citizens in other sectors if they were so inclined.
 
That liquor business is managed by states is not uniquely Indian. Even in the US, in 22 states there are mostly government-run liquor shops. What is interesting is that their combined revenue of nearly $18 billion or Rs 1.35 trillion is comparable to what Indian states earn from the trade: Rs 1 trillion annually from the trade plus some more including profits from ancillary services such as licence fees for shops, branding fees, auction rights etc.  This sum is roughly equivalent to what the Centre has promised to give them to build capital assets in FY23.
 
Another example of how states keep their rules for liquor business distinct is evident in how they set the ex-distillery price of liquor. Those should be the same across the country for any brand, but each state follows different policies on the valid factory gate price. This is because states such as Goa and Karnataka give set offs for the inputs used to manufacture liquor, like ethyl alcohol. “Where there are no input set offs, the final price will be higher,” a liquor manufacturer pointed out.

Varying taxation rates on sale of liquor, is only one differentiator. In Madhya Pradesh, auditors found changes made in the tenders for opening shops had moved the excise tax receipts significantly. The state recorded a 15.7 per cent rise in state excise “mainly due to increase in the amount received during tendering of liquor shops” (according to the Comptroller and Auditor General’s report of 2019). Yet, there was space for more correction. 
 
Each year, all brands of liquor a company plans to sell in a state have to be registered with the respective excise departments, for a price. In Delhi, for instance, the price is Rs 25 lakh per brand. Many states, especially in the south, have set up government-run companies to buy liquor wholesale from manufacturers. Here, too, there are differences. While Andhra Pradesh has allowed private retailers to sell to consumers, Tamil Nadu has kept both ends of the business government-run.
 
Liquor companies are not entirely averse to these set-ups. “Wherever the state has set up a corporation, the procurement process has become easier”, a former finance secretary said since each brand had to be re-registered each year by the state excise departments. Dealing with a corporation means there are fewer layers of officialdom to contend with, he explained. 

Elsewhere, complexities abound. In Maharashtra, one of the country’s largest liquor markets, liquor bottlers sell directly to wholesalers at government-approved rates. In Uttar Pradesh for some years, a special zone (Meerut) was created to check liquor smuggling into the state. But two border districts (Aligarh and Mathura) were not included and seven districts, which did not share borders with any of the neighbouring states, were included in the special zone.
 
In most states, these departments also employ the largest number of directly recruited staff, except for health and police departments. Jharkhand has introduced an online registration of brands of liquor. Unlike the quality of paperless certificates in departments like mines, health or education, those for liquor are honoured and no company has reported being harassed for expanding production or supplies once those were issued.
 
The attention to details is not surprising given the revenue potential of liquor sales. In most states liquor is the largest source of revenue after petrol and diesel. It has been so for decades and shows no sign of giving up its rank. And liquor is one of the country’s fastest-growing consumer businesses. Average alcohol consumption in India has risen to 5.7 litres per person, up from 4.3 litres in 2010. The business is expected to log a compounded annual growth rate of 7.4 per cent, to reach $68 billion by the end of 2026, according to a report by US-based Future Market Insights, Inc.
 
This is why it matters how the tussle between the Delhi government and the Centre on the policy for sale of liquor in the national capital will pan out.

A clarification

Responding to this report, the Madhya Pradesh government clarified that no liquor shop in the state is running without an excise licence. An earlier version of the report erroneously suggested 794 shops in Madhya Pradesh were running without a licence. The report’s contention was based on a CAG report which stated these liquor shops did not have an FSSAI licence. The misunderstanding caused is regretted.