Policy Changes And Their Impact On The Liquor Industry

It is true that the demand for liquor is inelastic, however the industry is not immune to policy impact that can affect its
ability to maintain prices or supply

09 September, 2018 by Surya Phadke

Half a Millennia ago the Florentine Republic was undergoing a change in both its political and social mindset-At its’ helm was
Niccolo Machiavelli, a Master Tactician who proclaimed- The one who adapts his policy to the times prospers, and likewise that the
one whose policy clashes with the demands of the times does not.

Much like Florence, India’s federal policy has seen a massive shift over the past three decades - We are part of the WTO, the
increase in income of the middle class has seen the rise of consumerism and the change in guard at the helm of our republic has
triggered a spate of changes in our policies. It is now more than ever that we need to understand and evaluate the impact of these
policy changes.

In India, Federallaws govern the liquor industry, which translates to a gamut of regulations and policies that are
revised every year and may include changes to the licensing fees and other taxes.

One such major policy change from the recent past is “De-Monetization”. This unprecedented decision by the central
government created a liquidity vacuumand affected adversely the public ability to purchase liquor. The FY 2016-
17, Delhi Excise saw revenue shrink by 0.38 %, against an average YoY growth rate of 13%. This translates to
roughly INR 560 Crores of loss to the Delhi State exchequer.
The problems are compounded when the Judiciary steps in like when they with the “Highway Ban on Sale of Liquor”.
This “shock” impact caused Retail outlets, Hotels and Restaurants within a 500 m radii of National highways to turn
away customers. The impact of this move can be best highlighted by the loss ofINR 14,000 Crores (approximate) to
the Maharashtra State Government.

Both these policy changes came as a shock and could not be factored in by Liquor companies. This lack of clear
communication from policy makers results in the industries’ inability to mitigate risks. In the figure (See Fig 1) we can
clearly see that both minor and major policy changes have resulted in significant deviations from the average with only
4 years registering average growth since data collection began in year 1994-95. Though De-Monetization and the
Highway Ban are so –called “Black Swan” events and help us highlight the plight of the industry, we can clearly see
that even minor changes have an impact on industry health.

On the contrary not all policy changes are “Adverse”. Policy changes in the past have helped open up industries by
introducing preferential tariffs, infusing capital or lowering barriers to entry. Such changes can have a positive impact
on any industry.

The FY 96-97 saw a 33% growth rate in revenue collection by Delhi Excise. Can you guess what the underlying
trigger was?- India Signed the WTO agreement on 1st Janaury 1995. While this date is just notional- it did signal the
emergence and opening up of India as a potential mutli-billion dollar market. Even though the import duty was to
remain at 233% up until 2003, it did create the opportunity to exlpoit Indias market potential.
It is true that the demand for liquor is inelastic, however the industry is not immune to policy impact that can affect its
ability to maintain prices or supply.

So the next time you see an increase in price of your favorite tipple, You’ll now know why!

______________________________

Regulations that leave the country's liquor

consumers high and dry
Rishika. S. Pardikar
15th Apr 2016

Regulatory authorities are as addicted to and puzzled by the alcohol industry as a consumer is by
the drink itself.

Excessive taxation led to expensive liquor which in turn sprung up incidents of hooch tragedies
caused by toxic bootleg liquor. An all-out ban in Gujarat created ‘folders’ who now have lucrative
careers smuggling and selling alcohol. “Prohibition just did not work,” said Lalsawta, Mizoram’s
Finance Minister, in an Al Jazeera report. The northeastern State revoked its 18-year-old ban in
January, 2015, while neighbour Manipur, lifted prohibition in five hill districts in 2002 and has been
considering complete revocation since 2014, owing to cheap tipple produced in Assam finding its
way into the State, thereby cheating the State of its revenue. A ban on advertisements for
alcoholic beverages led to surrogate advertising, wherein companies promote their brands using
alternative products or brand extensions – CDs, mineral water, events and sports franchises. To
top it all, the States are now unwilling to let the rich brew be regulated by Goods and Service Tax
(GST), thereby falling out of their sole control.

Alcohol is a State subject in the Constitution of India and therefore State governments have the
exclusive power to control its manufacture, possession, transportation, purchase and sale. This
State-governed taxation policy is one of the most opaque and graft-ridden systems with price
manipulations, political patronage (liquor manufacturers use ethanol that is distilled from
molasses, which is a by-product in sugar manufacture. Sugar mills are controlled by politicians
and prices are determined by the political party that has the most clout) and illegal imports into
high-tax and alcohol-prohibited States. The fact that the trade is usually off the books only adds to
the already messy affair.
Liquor and GST
Bringing the liquor industry within the purview of GST will push through the need for
documentation – evasion would be a complicated process given how documents leave behind an
audit trail.

“GST on alcohol will lead to incremental revenue of Rs 800-1,000 crore for every percentage point
of GST. The industry is willing to bear the additional tax burden of Rs 20,000 crore for greater
transparency and better regulation when there is seamless coordination between the Centre and
State administrations that can help plug revenue leakages,” said Sonjoy Mohanty, Secretary
General at International Spirits and Wines Association of India (ISWAI).

Despite vehement protests by the representatives of the industry, liquor has been left out of the
proposed GST scheme owing to the fear States have over losing one of their biggest sources of
revenue.

The States ought to concur to general national interests and the Centre ought to push forth
reforms on important bills like the GST. Dialogues between the Centre and the States cannot be
sidelined, far less completely ignored, citing complexities in negotiations.

Also, leaving out liquor creates distortions in the input tax credit chain. Inputs would be taxed at
GST rates while outputs from factories would attract State levies. This difference in taxation of
inputs and outputs makes the input tax credit ineligible leading to high prices due to cascading
effects.

Liquor and taxation rates

“Beer, if taxed rationally, positioned more liberally, viewed more positively will wean people away
from hard liquor. This will therefore do immense good to society at large,” a report by All India
Brewers Association (AIBA) stated. The association has been demanding a separate classification
for beer from hard drinks given how the alcohol content in beer ranges from five to eight percent,
which is significantly lower than that of the spirits category (42 percent).

“Today, a bottle of beer, say, retails at Rs 90 (with 33 ml alcohol) while a nip (180 ml) of regular
whiskey (with 77 ml alcohol) retails at Rs 80. This drives the youth to spirits,” said Shobhan Roy,
Director General of AIBA, in a report to The Hindu.

With our ‘value for money’ outlook, we easily turn to hard liquor for a better high when seen
amongst bottles of beer and wine. Taxing drinks based on their alcohol content would act as a
deterrent to the consumption of hard liquor, slowly nudging people towards beverages which are
the lesser among evils.

Smart taxation, as opposed to heavy taxation and prohibition, is the need of the hour. GST is the
single biggest reform on the indirect taxes front that would amalgamate the several taxes now
being imposed at the Centre and State level, thereby providing a common national market for
goods and services. The simplification in the indirect tax regime would also make administration
easier. GST is a game-changing reform for the Indian economy and leaving liquor out of its
purview dampens the spirit of this hopeful new law.