Taxation on Alcohol and related products

One of the most harmful products that is considered bad for the health of the individuals and society is alcohol. An alcoholic drink is a drink that contains ethanol, a type of alcohol produced by fermentation of grains, fruits, or other sources of sugar. The consumption of alcohol plays an important social role in many cultures. Most countries have laws regulating the production, sale, and consumption of alcoholic beverages. Some countries ban such activities entirely, but alcoholic drinks are legal in most parts of the world. The global alcoholic drink industry exceeded $1 trillion in 2018.

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The tax levied on such a commodity is known as sin tax. The rate of sin tax is kept generally high for the sole aim of deterring people from consuming such a harmful commodity. When tax rates are set at high levels, the prices tend to shoot up. That in a way restricts the consumers from buying and consuming the harmful commodity. Another benefit of such a tax is that it is a great source of revenue for the government. So taxing a commodity like alcohol at high rates is often justified by the government on the grounds that the commodity alcohol being consumed is injurious to life. It is the root cause of several life threatening diseases.

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In India the taxation of alcohol is kept outside the ambit of Goods and Services Tax for the above two reasons. If alcohol would have been taxed as per the Goods and Services tax, the revenues of the state governments would have affected a lot. So taxation of alcohol is kept at the discretion of the state government. The overall tax rates on alcohol lead to increase in the price from 50%- 300% depending on the state government that is levying the tax. For instance, the state of Gujarat has entirely banned trade and consumption of liquor since 1961. By contrast, Puducherry, the territory on the Coromandel Coast, earns most of its revenue from alcohol trade.

Generally the taxation of alcohol comprises of two taxes:

  1. Excise Tax – charged on the production of alcohol
  2. VAT- charged on the consumption of alcohol

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In spite of GST not being levied on liquor, the prices of liquor continue to rise after the rollout of GST. This is because the inputs used to manufacture liquor were taxed at 12-15% under the VAT regime. However, after the introduction of GST, most of the input raw materials now attract 18% GST resulting in increased input cost. This rise in taxes on the inputs is passed on to the end customers.

The other reason for the sharp increase in the cost of liquor is the applicability of GST on transportation and freight charges. Previously, transportation and freight attracted a service tax of around 15%. However, post-GST, they are taxed at 18%. Hence, even with no major changes in the VAT rates charged on beer or liquor, the cost of beer and liquor had increased due to the increase in input taxes.

Indian whiskies, including scotch, will be among the largest contributors of growth to the global whisky market over the next five years, according to the latest forecast by International Wine and Spirits Research (IWSR). According to India Brand Equity Foundation, the growth in the whisky market will be propelled by consumption of both local and scotch whiskies in India, which is the largest growth market for that spirit category in the world. At a global level, scotch is expected to contribute 10.5 million cases to total whisky growth, while others (predominantly Indian) will grow 28.2 million cases, according to IWSR data.

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The liquor manufacturers for this reason are not much supportive of the government’s decision to exempt liquor from GST. As there has been a rise in the overall cost of producing alcohol due to increased taxes on the inputs. Further, as the output is a tax-exempt product for the manufacturers they need to pay input taxes on inputs and which cannot be claimed refund of tax. This is a long process, which leads to the lengthening of the working capital cycle too. Most of the industry insiders wish that beer should be brought under the GST regime. This will have a remarkable impact on the flourishing tourism industry.

For any question visit us at GST Discussion Forum

The author of above article is Tanuja Puri, Assistant Professor.

Disclaimer:The article or blog or post (by whatever name) in this website is based on the writer’s personal views and interpretation of Act. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon.  It is prepared based on understanding of provisions as stood applicable as on date.
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