CPPR Senior Fellow Dr Jose Sebastian comments in a news article published in The Hindu Business Line on the impact increasing the sales tax of liquor in Kerala.

Image source: The Hindu Business Line

Shock varies across communities

By raising sales tax on liquor up to 35 per cent, Kerala may just have plotted a reprisal of the arrack ban in the State in 1996, that had forced poor and marginalised consumers to go instead for costlier India-made foreign liquor (IMFL). The latest hike may raise an additional ₹2,000 crore in revenue for the resource-strapped State government, but at the cost of family budgets of the vulnerable.

The current increase in tax rate is only going to exacerbate their penury, already severely hit by the Covid-19 pandemic. Ironically, the State government is citing the very pandemic and its impact on its economy as the proximate reason for the move. After all, governments ruling the State till date have looked at liquor revenues as the elixir that keeps the economy afloat.

Addicted to liquor revenue

The State is as fond of liquor revenues just as its tippler community is of the spirit. Post-2018 floods, the State raised the excise duty on liquor for 100 days with a view to tiding over a fiscal crisis. Two years down the line, Covid-19 has prompted it again to reach out for this low-hanging fruit. The latest hike will take in liquor sales tax up to 247 per cent, among the highest in the country, notes Jose Sebastian, public finance expert and former faculty of the Gulati Institute of Finance and Taxation.

The poor and marginalised consumers take the biggest hit here, Sebastian says. “There is a compelling body of evidence to show that the impact from the liquor price hike varies from community to community, as is applicable for the quantity consumed,” he told BusinessLine. Liquor sales in the Malabar district, where 71.87 per cent of the State’s Muslims population is located, is significantly lower than the Travancore-Cochin districts, he said, quoting statistics.

Consumption patterns

The poor people spend a larger proportion of their daily income on liquor than the middle-class and the rich. The latter do spend, but as a proportion of their monthly income, it is a measly sum, notes Sebastian. The proportion of poor people among Christians (18.4 per cent) is substantially lower than that of the Hindus. The proportion of the poor and marginalised among Hindus (54.72 per cent) is substantially higher. “Islam discourages liquor, which leaves the burden disproportionately heavy on the poor among the Hindu community.”

A comparison of the purchase price and retail price of the public sector monopoly wholesaler and retailer, the Kerala State Beverages Corporation (KSBC), is mind-boggling Table 1). The difference between the purchase price and retail price is almost 10 times in the case of one brand. In the case of some others, it is higher than 11 times. With the 35 per cent increase in sales tax, the prices may have gone up further. To give examples, the price of Old Monk XXX Premium Rum Select is now ₹850 and No 1 Honey Bee Brandy is ₹620.

Failed objective

The avowed objective of levying prohibitive rate of tax on liquor is discouraging consumption. But this remains a pipe-dream to date. “What happens instead is that the family budget will be pruned to accommodate liquor. One need not look beyond trends in liquor consumption to get a handle on this. In terms of the quantity consumed, Kerala is fourth after Andhra Pradesh, Bihar and Punjab (Table 2). But in terms of value, Kerala is second to Andhra Pradesh. This is because, compared to other States, Keralites prefer the costlier IMFL,” says Sebastian.

This news article was published in The Hindu Business Line on May 18, 2020. Click here to read

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