Delhi govt prepares new excise policy that will increase liquor prices by 50%

A move to raise excise duty on liquor and change the format of retail sales by the Aam Aadmi Party-led government has set the proverbial cat among the pigeons in the Indian Capital.

A panel of experts, formed by the government in Delhi, has suggested sweeping changes that could push booze rates in Delhi to an all-time high and change the way drinks are sold in Delhi NCR by the government and privately owned shops.

MoneyControl has reviewed the report, which says the Delhi government is contemplating a near 50 percent increase in booze prices and raise its revenue from Indian liquor, foreign liquor and country liquor to nearly Rs 8,000 crore from the current earning of Rs 5,000 crore.

What The Government Now Earns

According to the report, the Delhi government currently earns excise revenue of Rs 46 crore from brand registration, Rs 4,507 crore from Indian liquor, Rs 240 crore from foreign liquor and Rs 210 crore from country liquor. The state government also earns Rs 170 crore from licence free from restaurants and bars servings liquor, Rs 300 crore from export and permit fees and Rs 40 crores from retail licences. It totals up to Rs 5,068.70 crore, which the state government wants to increase to nearly Rs 8,000 crore.

Quality Trouble For Smaller Players

But the new guidelines could make things difficult for medium and small manufacturers. For the record, the committee has recommended that the Delhi government abolish rum and whisky brands below Rs 140 so that quality products are made available.

On the flip side, the committee has also recommended fewer number of Dry Days in the Indian Capital, mainly to checkmate the crowds from going to neighbouring Noida and Gurugram. It has also suggested lowering the legal drinking age in Delhi to 21 and extending timings of restaurants and bars serving liquor.

The committee has recommended to the Delhi government that its annual excise of Rs 4,513 crore from Indian liquor, foreign liquor and country liquor must touch the figure of Rs 6,412 crore. This, in turn, means liquor shops will now have a target and they need to fulfil the same every month. The target is meant mainly for state-owned vends which rarely push for sales, unlike private stores.

In the post-GST scenario, states have only four areas on which they have the power to levy taxes, ie., VAT on petroleum products, excise duty and VAT on liquor for human consumption, stamp duty on real estate and tax or duty on electricity. Now, due to the peculiar nature of Delhi’s legal status, Delhi is forced to generate 80 percent of its revenue receipts through its “own tax revenue” whereas this number is just 55 percent for Haryana and 37 percent for Uttar Pradesh, states which border Delhi. In both Haryana and Uttar Pradesh, a significant portion of the revenue comes through share in Central taxes, which is zero in the case of Delhi.

According to the report, Central grants to Delhi have remained stagnant at Rs 325 crore since 2001-02, even though Delhi’s contribution to the Central coffers has increased  10-fold in the same period (an estimated rise from Rs 9,000 crore to Rs 91,000 crore). The tussle between implementing the 14^th Finance Commission recommendations in  Delhi and the 4^th Delhi Finance Commission recommendations, has resulted in a cash crunch for Delhi, which must generate a significant revenue (tax receipts) on its own.

The Committee said Delhi excise revenue generation is much lower than states like Uttar Pradesh and Karnataka. As GST is dependent on consumption, and the rates are decided by the GST Council, Delhi - the Committee said - must look into its own exclusive taxation areas.

“Given the sensitivity around  Petrol and Diesel pricing, the consumer facing taxation of electricity, and given the  pandemic-stricken real estate industry, the state isn’t left with many options to augment revenues. The AlcoBev trade in Delhi must be investigated for possible areas of revenue  leakages/gaps,” the committee said.

The committee said with the State GDP growth above 10 percent y-o-y, and most revenue streams growing at a similar  rate, the alcohol revenue has shown an only 8 percent compound annual growth rate (CAGR) in the last 6 years. The industry has been almost flat since 2014; alcohol volumes in India have shown a 6 percent CAGR for the last six years, indicating a gap existing in Delhi alcohol trade.

“With an 8.3 percent CAGR revenue in the last 6 years, excise revenue has peaked, and it does not have further headroom to grow under the current route to market structure,” said the Committee, which was constituted in September 2020 to recommend ways to push revenue.

The committee said wholesale trade by a government entity through a corporation-based model should provide buoyancy by bringing a large number of goods in the chain. In short, the Delhi government wants to have more state-government owned liquor vends in Delhi NCR.

The committee said similar moves helped removal of monopolies in neighbouring Uttar Pradesh, with revenues moving from Rs 17,320 crore in 2017-18 to Rs 23,918 crore in 2018-19, a jump of 38 percent and a target of Rs 34,500 crore in 2021-22.

“States which moved to a Beverage Corporation model have seen a spike in revenue immediately, indicating that the model does help in bringing more goods into the tax chain. In Karnataka, alcohol revenues doubled in 4 years. Other States like Rajasthan, Odisha and Andhra have also seen a similar trend on revenue collections together with buoyancy in volumes,” the committee said.

Early Reactions

The markets responded with cautious optimism.

“Delhi’s tax revenues this year are down 40 percent, and the allocation to the State from the Union Budget has been static. With increasing revenue pressures in these unprecedented COVID times, it is not surprising that the Delhi government, like so many other states, has turned to AlcoBev to meet its revenue needs. We hope that the recommendations will usher in significant buoyancy in Delhi's revenue structures,” IP Suresh Menon, Secretary-General of the International Spirits and Wines Association of India (ISWAI) told MoneyControl.

The report has acknowledged the malpractice related to brand pushing at government vends. As a result, the overall market has become inefficient as genuine market forces aren’t at play. The committee said consumer choices are being denied, and the market is artificially being skewed towards cheaper non-popular brands that are not the consumers’ choice. Many non-compliant companies have indulged in corrupt practices, which, the committee said in the near future, may turn into a completely compromised supply chain, which would dent Delhi’s reputation for honest, and business-friendly governance.

“The revenue from excise duties from IMFL for Delhi has remained stagnant due to a number of reasons, primarily due to marginalisation of popular brands, corruption and cartelisation amongst the retail. The reforms suggested by the Committee will address most of the issues we have been recommending for a number of years,” Pramod Krishna, former head of Confederation of Indian Alcoholic Beverage Companies told MoneyControl.

The committee says to nip the issue of non-popular brands at the first stage, a moderate label registration is a must. “A high label registration fee may deter registrations of such brands on account of their financial non-viability.  The Delhi label registration fee is enormous and is the highest in India by any standards. The neighbouring states of Haryana and Uttar Pradesh have far  reasonable levels of Label Registration fees..”

The committee said Delhi’s retail density/lakh of population is amongst the lowest and this needs to change. “Delhi’s demand is being catered by retails in Noida and Gurugram.” The distribution of the current retail network in Delhi is also not equitable.

Regions with low population density have considerably higher numbers of retail shops, and vice versa. This creates demand and supply gaps, which ultimately provide an opportunity for, and fuels, the movement and supply of illicit and non-duty paid liquor.

The number of sanctioned licences in Delhi is around 960. Uttar Pradesh has the highest number of AlcoBev vends in India (27,300). Delhi has not undertaken an increase in retail vends since 2016, despite a manifold increase in its population (including the floating population).