Context: Following the easing of restrictions in the third phase of the nationwide lockdown, some of the most striking images showed long queues outside liquor stores around the country. 

  • The Delhi government announced a 70% hike in the price of liquor across categories in the capital.

The importance of liquor to the economy of the states: Manufacture and sale of liquor is one of the major sources of their revenue, and the reopening comes at a time when the states have been struggling to fill their coffers amid the disruption on account of the lockdown.

State finances under strain due to lockdown: 

  • Strained sources of finances:  There have been no new vehicle and property registrations since the lockdown began and also no sale of liquor. 
    • Petroleum sales have dropped by about half as commercial activity is at a standstill and vehicles and planes idle. 
    • Own tax revenues of the States have plunged by 80-90%, leaving their finances in the lurch.
  • Welfare Burden increased on states: states have to spend more to ease the burden on the poor with direct cash transfers to the needy and on beefing up health infrastructure, apart from the expenses on testing, quarantining and treating of patients.

How do states earn from liquor?

  • Contribution to state GDP: Liquor contributes a considerable amount to the exchequers of all states and Union Territories except Gujarat and Bihar, both of which have enforced prohibition.
  • RBI report: RBI published a report in 2019 titled ‘State Finances: A Study of Budgets of 2019-20’.As per the report, state excise duty on alcohol accounts for around 10-15 per cent of Own Tax Revenue of a majority of states. 
  • Duties and taxes on liquor: 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.

How much do the state governments earn from excise on liquor?

  • The RBI report shows that during 2019-20, the 29 states and the UTs of Delhi and Puducherry had budgeted a combined Rs 1,75,501.42 crore from state excise on liquor. This was 16% higher than the Rs 1,50,657.95 crore they had collected during 2018-19.
  • Uttar Pradesh collected a monthly average amount of Rs 2,500 crore from liquor.

Which states collect the highest amounts in this form of revenue?

  • During 2018-19, the five states that collected the highest revenue from excise duty on liquor were Uttar Pradesh, Karnataka , Maharashtra , West Bengal and Telangana.
  • Some states like Uttar Pradesh only collect Excise duty on manufacturing of liquor and some also collect VAT.

What is state Excise duty?

  • State excise is levied mainly on liquor and other alcohol-based items. 
  • Revenue receipts from state excise come mainly from commodities such as Country Spirits, Country Fermented Liquors; Malt Liquor andLiquor etc.
  •  A substantial amount comes from licences, fine and confiscation of alcohol products.

Other sources of revenue for states:

  • According to the RBI report, in 2019-20, state GST had the highest share, 43.5%, in states’ Own Tax Revenue, followed by Sale Tax at 23.5% (mainly on petroleum products which are out of GST), state excise at 12.5%, and taxes on property and capital transactions at 11.3%.

State finances

Source of finances

45 percent of total state’s finances

  • Revenues from own taxes account for just under half of the total revenues of the States.

90 percent of own revenues

  • It comes from taxes on liquor, petroleum products, stamp duty and registration of vehicles.

Devolution by centre

  • State share of gross tax revenue

Scheme related transfer

  • Centrally sponsored scheme

Finances commission

  • Transfers made to states on the recommendation of the Finance commission appointed by the centre.


Excise Duty

  • Union excise duty is a type of indirect tax on goods manufactured in India.
  • Union excise duties are levied in accordance with the rates mentioned in Schedule I and II of the Central Excise Tariff Act, 1985. The taxable event here is the ‘Manufacture’.
  • The burden of taxation is, however, passed on to the consumers by the manufacturer. 
  • Excise duty is subsumed under GST. But there are some exceptions to which excise duty will continue even after GST. 
  • Excise duty is levied on liquor and alcoholic products used for human consumption (if they are consumed for industrial purposes like antiseptics, they come under GST) by the State governments.

VAT-Value added tax

  • A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. 
  • The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
  • VAT was introduced as a value added tax (VAT) into the Indian taxation system from 1 April 2005.
  • As a taxation concept, VAT replaced Sales Tax.
  • VAT was introduced to make India a single integrated market. On June 2, 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.
  • GST subsumed VAT to remove its cascading effect.

Source: https://indianexpress.com/article/explained/explained-why-states-are-so-keen-about-excise-duty-on-liquor-6393643/

Image Source: forbes