The lockdown enforced to tackle the outbreak of the pandemic halted economic activity across the country. This has hit the revenues of the states. This was the reason, the states were keen to open liquor shops despite concerns that social distancing norms would not be followed.
Before going into detail of taxes on alcohol, let us look at how states generate their revenues. There are two major sources of income for the states:
- States’ own sources: During the period 2015-20, 53 % of the total revenues of states have come from own sources. Own sources consist of tax revenue (45 %) and non-tax revenue (8%)
- Central transfers: The share of central transfers in the total revenue during the same period was 47 %. Central transfers consist of share in central taxes (28 %) and grants from the center (19 %).
[Note: the above data is for aggregate revenue for all states. The contribution of states’ own sources is significantly higher (more than 70% of total state receipts) in some states such as Haryana, Maharashtra, Gujarat, Tamil Nadu, Telangana, and Delhi. On the other hand, states such as Bihar, Jammu and Kashmir, Himachal Pradesh and the north-eastern states depend on central transfers for most of their revenue. ]
As mentioned, own tax revenue has been the largest source of revenue (45%) for states. Own tax revenue consists of receipts from (i) goods and services tax (GST) (ii) sales tax/value-added tax (VAT), (iii) state excise, (iv) stamps and registration fees, (v) taxes and duties on electricity, and (vi) land revenue, among other taxes and duties.
[States earn non-tax revenue through various sources such as royalty, dividend from public sector enterprises, fees and fines etc ]
States GST (SGST) is the largest source of own tax revenue of states. In 2019-20, it was 43 % of the own tax revenues of states.
[You may read: What is GST?]
After SGST, the sales tax/VAT (23%), and the state’s excise duty (13%) are among the largest sources of revenue for the states. They are levied on manufacture and sales of petroleum products and alcohol. [ Petroleum and alcohol are outside the purview of GST. The states were not willing to include these products under GST because they contribute a considerable amount to the exchequer of most states]
Stamp duty and registration fee (10 %), Taxes on vehicles (6%), and electricity (3%) also contribute a significant share to the revenues.
That said, the GST collections are bound to fall sharply in 2020-21. It will impact not only central transfers to the states but also the states’ own tax revenue (SGST). Also, during the lockdown, there were no sales of liquor. There were no registrations of vehicles as well. The states could not collect stamp duty as there were no property transactions. Sales of petroleum products also declined. As a result, in April 2020, tax revenues for most states were just 10 % of April 2019 levels.
The coronavirus pandemic has led to a sharp fall in the incomes of states and increased expenditures. As VAT and excise duty on liquor is one of the major sources of their revenue, the states were quick to open the shops after the lockdown was eased.
Delhi even imposed a special “corona fee” on alcohol. It increased excise duty to 70 % of the MRP.
Liquor contributes a considerable amount to the exchequers of all states and Union Territories except Gujarat and Bihar, both of which have enforced prohibition. Generally, states levy excise duty on manufacture and sale of liquor. Some states, for example Tamil Nadu, also impose VAT (value added tax). States also charge special fees on imported foreign liquor; transport fee; and label & brand registration charges. A few states, such as Uttar Pradesh, have imposed a “special duty on liquor” to collect funds for special purposes, such as maintenance of stray cattle.
Source: Indian Express
Long story short, states considered sales of alcohol important to bolster its finances which are struggling due to the pandemic.
So, now you know, why states opened these liquor shops despite not able to maintain social distancing norms.
[You may read: Debt monetisation- Should it be done in light of the pandemic?
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