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Alcobev sector in India needs a complete overhaul

The European Union has repeatedly raised concerns over the wide variations in pricing policies, taxation and regulations across Indian states, with particular focus on the heterogeneous structure for alcoholic beverages. In India, states can levy their own duties on imported alcohol. States such as Punjab, Maharashtra, Karnataka and Tamil Nadu levy high taxes and additional special fees on imported foreign liquor, as well as liquor produced in other states to protect local manufacturers from competition and to generate state revenue.

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In Tamil Nadu, the special fee on imported wine is INR308.69 for ordinary wine, INR389.89 for medium wine and INR450 for premium wine. In Maharashtra, the excise duty on ‘wines manufactured as a foreign brand from the bulk wine or wine concentrate, or grape juice or grape imported from across custom frontiers or from other states’ is 200 per cent of manufacturing cost, while the duty on ‘wines from grapes that are imported from across custom frontiers, or from other states’ is 150 per cent of the manufacturing cost.

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Considering that excise revenue from sales of alcohol is one of the largest stand-alone contributors to the revenues for state governments, there is a need for evidence-based pricing regulation and taxation. An on-going survey covering policies in 10 states of India found that the states have distinct methods of calculating taxes and levying price regulations that are often ad-hoc and opaque, resulting in a balkanized market. In the case of whisky for example, which has the largest consumption in India and mostly produced in the country; the states have different methods of calculation of the slabs for determining excise and use different terminologies. It is also a practice for some states to ask for and benchmark prices of neighbouring states.

The entire exercise seems to be fairly detached from analysing consumer demand patterns or taking into consideration inflation, while fixing base prices and then calculating the taxes. Many states ask for the lowest possible base price (referred to as the Ex-Distillery Price in some states) while cost of production may vary across states. Some states like Uttar Pradesh have a cess (for example, cow cess). The variations in state excise policies convert India into more than 30 heterogeneous markets instead of a “single market”. This issue has been raised not only by the EU but also by other trading partners like Australia and the USA.

The re-launch of the discussions under the EU-India Broadbased Trade and Investment Agreement (BTIA) on May 2, 2021, was a landmark event as the EU is among the key export markets for India. Greater market access in the EU and investment from the EU will help to enhance exports and revive growth. However, reaching a consensus between the two economies will not be easy until pending market access issues, which led to the suspension of the negotiations in 2014 are resolved.  

One of the key market access issues at that time was that neither the EU nor India operate like a “single market”. For example, a key area of India’s export interest is high-skilled labour mobility, the policies regarding which in the past varied widely across the EU member states. On May 15, 2014, the EU adopted the Directive on Intra-Corporate Transferees (ICT), which presented the conditions of entry and temporary residence of third-country nationals within different EU member states. Except for Ireland and Denmark, most EU members have adopted this legislation. While there are issues in some member states like Belgium, the legislation has been welcomed by Indian industry bodies as it brought uniformity across the member state policies with respect to the entry of high-skilled professionals. 

Focusing on India, the EU specifically raised two issues. First, the high import duties on alcoholic beverages and second, the state level variations in policies, especially those with respect to higher excise duties on imported products as is implemented by wine producing states of Maharashtra and Karnataka. The present duty comes to 50 percent basic custom duty plus 100 percent Agriculture Infrastructure and Development Cess, a total of 150 percent, which is even levied on intermediate goods and bulk production where value addition happens in India.  At the state level, the variations in state pricing models, has led to growth of large illicit liquor market. 

Globally more than 78 countries use price control measures. Price control measure is the key tool used by the states in India to reduce consumption. Studies by organisations such as Euromonitor International shows that alcohol consumption globally, and in India, is price inelastic, which implies that higher prices may not deter consumption. There can be other intervention like moving consumers towards responsible consumption and product premiumisation. These can be done through a principal-based pricing model and through regular data collection and analysis of consumer shopping behaviour. One of the most comprehensive frameworks for a principle-based taxation model for the alcoholic beverages has been provided by Griffith, R. O’Connell, M. and Smith, K. (2019) in their article “Tax Design in the Alcohol Market”, which uses longitudinal data of the UK to show how consumers behave to changes in prices. Governments through right policies can guide consumers to quality consumption and lower intakes.

In May 2018, the Scottish government imposed a minimum unit price which has the maximum impact on low-priced, strong drinks, which are mainly sold in supermarkets and shops. The aim was to promote consumption of good quality products. In India, there is a need to learn from these global experiences and have evidence-based, data-driven policies, which can help to meet government objectives of higher revenue and health protection.

Based on such global examples, the research team is in the process of developing principles for regulation of alcoholic beverages in the Indian context, which can serve as a model for the states as they design their policies. Such a model, on the one hand, will help the excise department to earn revenues and meet their goals of consumer health protection and, on the other, provide a transparent and predictable business model. While there are likely to be some variation across Indian states as has been the case of the EU ICT Directive, this approach will help to “Make in India”, get more investment in manufacturing from the EU and to treat India as a “single market”. 

Disclaimer

Views expressed above are the author’s own.

The above news was originally posted on timesofindia.indiatimes.com, authored by  

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