The Karnataka Government is embarking on an unprecedented journey, making headlines with its revolutionary budget proposals concerning the alcohol sector.
For context, it’s important to note that the Constitution (Schedule 7, entry 54) grants states the authority to levy taxes on alcoholic beverages for human consumption. This has notably been excluded from the Goods & Services Tax (GST) even after the 101st Constitutional amendment introduced the Act.
The alcohol industry’s influence in India extends across agriculture, manufacturing, and services, with its estimated size at around Rs.3.9 lakh crore. It contributes significantly to the country’s GDP, accounting for nearly 1.4%. According to the International Spirits & Wines Association of India (ISWAI), the sector supports approximately 7.9 million jobs. In summary, it serves as a vital economic engine. Notably, the Supreme Court has clarified that states possess the authority to tax denatured spirits (alcohol rendered unsuitable for human consumption) and industrial alcohol, thereby resolving potential fiscal disputes between the Centre and states.
Following the introduction of GST and a significant reduction in revenue mobilization capabilities for states, alcohol has emerged as a crucial revenue source. States with other robust revenue avenues, like state GST or higher stamp duties, tend to rely less on alcohol. Historically, states such as Maharashtra, Tamil Nadu, and even Kerala have depended less on revenue from alcohol.
Conversely, states like Andhra Pradesh, Uttar Pradesh, and Karnataka have relied heavily on alcohol revenue, with 19-23% of their revenue derived from it. Indian Made Foreign Liquor (IMFL) is particularly favored, and there’s a humorous notion that Indians consume more Scotch than Scotland produces!
It is recognized that alcohol qualifies as a ‘sin’ good, causing harm both to the individual and to society as a whole, which experiences the repercussions of excessive drinking. The rationale behind high taxation on alcohol stems from its ‘sinful’ nature, linked directly to its alcohol content, which greatly varies.
Beer typically contains 4-6.5% alcohol, with stronger variants reaching about 8%; whiskey averages around 42.8%, with premium single-malts soaring up to 60%. Rum, gin, and vodka range from 38% to as high as 60%. Meanwhile, red wines contain between 13.5% and 15%, and white wines fall between 12-13.5%. By definition, wines are fermented from fruits, primarily grapes, and fortified wines (enhanced with distilled spirits) can exceed 20% alcohol content.
It is scientifically established that alcohol impacts the central nervous system, influencing neurotransmitters in the brain such as Gamma-aminobutyric acid (GABA) and glutamate. GABA induces calmness, while glutamate stimulates; thus, alcohol can create a false sense of relaxation while also heightening other sensations. Its consumption impairs balance, memory, and speech, leading to poor decision-making. Consequences include domestic violence, traffic incidents, financial troubles, and health issues.
Numerous studies, both globally and in India, quantify the social harms caused by alcohol in relation to GDP. Therefore, taxation should aim not only to generate revenue but also to mitigate social harm—the tax level should correspond to the degree of this harm. The funds raised should be allocated by the government to address these societal consequences.
While some states have established temperance boards aimed at raising awareness of the detrimental effects of alcohol (while also setting revenue targets), many others do not. Some states have taken a more puritanical stance, banning the production and sale of alcohol. Historically, prohibition has led to a host of issues, including the rise of illicit, adulterated liquor, resulting in fatalities, alongside enforcement challenges.
However, in most states that allow alcohol commerce and taxation, the emphasis has been on maximizing revenue without any connection to addressing associated harms. Given alcohol’s ‘sinful’ image, it has been subjected to stringent regulation and oversight. Karnataka, for instance, has implemented strict physical controls, requiring permissions for nearly every facet of brewery or distillery operations, including changes in production, pricing, and transportation. An officer has been stationed at each brewery/distillery to oversee compliance. This excessive regulatory burden has hindered the industry, appearing outdated in today’s technological landscape.
Karnataka’s budget proposal introduces an Alcohol-in-Beverage (AIB) based excise duty. As detailed in the Chief Minister’s budget speech, ‘An Alcohol-in-Beverage (AIB) based excise duty structure is globally recognized as the gold standard for alcohol taxation, directly addressing alcohol content—the primary source of negative externalities.’ This means that higher alcohol content will incur a higher tax, creating a proportional relationship between alcohol strength and taxation. Therefore, beer with lower alcohol content will be taxed less than whiskey. This logical approach marks a transformative shift from the previous tax practices of all states in India.
But the reform doesn’t stop there. The Chief Minister also highlighted that technology-driven advancements are being implemented to prevent revenue leakages through blockchain-based digital tracking systems. Physical escorts for product dispatch will be replaced by geo-fenced e-lock systems, enhancing transparency and enabling real-time monitoring. In essence, this will put an end to the Inspector-Raj system.
This approach represents a genuinely transformative, modern solution to the complex issues surrounding alcohol taxation—one that other states should observe, learn from, and potentially replicate.
—The author, Najib Shah, is former chairman, Central Board of Indirect Taxes & Customs (CBIC), and a Member of the Resource Mobilisation Committee of the Government of Karnataka.
