The attempt by the Aam Aadmi Party-led government to increase the excise duty on alcohol and change the format of retail sales has put the proverbial cat among the pigeons in the Indian capital. A panel of experts formed by the Delhi government has proposed sweeping changes that could bring Delhi alcohol levels to an all-time high and change the way drinks are sold in Delhi NCR by the government and private businesses.
MoneyControl has examined the report, which says the Delhi government is considering increasing alcohol prices by nearly 50 percent and increasing its revenues from Indian liquor, foreign liquor and country liquor from the current 5,000 rupees to nearly 8,000 rupees.
What the government deserves now
According to the report, the Delhi government currently earns excise tax revenues of Rs 46 billion from trademark registration, Rs 4,507 billion from Indian alcohol, Rs 240 billion from foreign alcohol and Rs 210 billion from country liquor. The state government also earns Rs 170 billion from licensing fees for restaurants and bars selling alcohol, Rs 300 billion from export and permit fees, and Rs 40 billion from retail licenses. It amounts to up to 5,068.70 rupees, which the state government plans to increase to almost 8,000 rupees.
Quality problems for smaller players
However, the new guidelines could make it difficult for medium and small manufacturers. For the record, the committee has recommended that the Delhi government abolish rum and whiskey brands under Rs 140 in order to provide quality products.
On the flip side, the committee has also recommended fewer dry days in the Indian capital, mainly to deter the crowd from going to neighboring Noida and Gurugram. It has also been proposed to lower the legal drinking age in Delhi to 21 and to extend the hours for restaurants and bars serving alcohol.
The committee has recommended to the Delhi government that its annual excise tax of Rs 4,513 billion on Indian alcohol, foreign alcohol and country liquor should reach Rs 6,412 billion. This in turn means that liquor stores now have a goal and must meet it every month. The target is primarily for government vending machines, which, unlike private stores, rarely push for sales.
In the post-GST scenario, states only have four areas in which they are allowed to levy taxes, i.e. VAT on petroleum products, excise and VAT on alcohol for human consumption, stamp duty on real estate, and taxes or duties on electricity. Due to the special legal status of Delhi, Delhi is now forced to generate 80 percent of its income from "own tax revenues", while this figure is only 55 percent for Haryana and only 37 percent for Uttar Pradesh, states bordering Delhi. In both Haryana and Uttar Pradesh, a significant portion of the revenue is generated from the share of central taxes, which in the case of Delhi is zero.
According to the report, central grants to Delhi have stagnated at Rs 325 billion since 2001/02, although Delhi's contribution to central coffers increased tenfold over the same period (an estimated increase from Rs 9,000 billion to Rs 91,000 billion). The dispute between the implementation of the recommendations of the 14th Finance Commission in Delhi and the recommendation of the 4th Finance Commission in Delhi has led to a financial crisis for Delhi, which itself has to generate considerable income (tax revenue).
The committee said that consumption tax generation in Delhi is much lower than in states like Uttar Pradesh and Karnataka. Since the GST is consumption dependent and the rates are set by the GST Council, Delhi – the committee said – needs to examine its own exclusive tax areas.
“Given the sensitivity to gasoline and diesel prices, consumer-centric taxation of electricity, and the real estate industry hit by the pandemic, there aren't many options for the state to increase revenue. AlcoBev trade in Delhi needs to be investigated for potential revenue loss / gaps areas, ”the committee said.
The committee said that with state GDP growing over 10 percent year-over-year and similar growth in most revenue streams over the past 6 years, alcohol income has shown a compound annual growth rate (CAGR) of only 8 percent. The industry has been almost flat since 2014; Alcohol volume in India has shown a CAGR of 6 percent over the past six years, indicating a void in the alcohol trade in Delhi.
"With CAGR sales of 8.3 percent over the past 6 years, excise tax revenues have peaked and there is no further room to grow on the current path to market structure," said the committee that formed in September 2020 was to suggest ways to increase revenue.
The committee said wholesale should be boosted by a government agency through an enterprise model by adding large numbers of goods to the chain. In short, the Delhi government wants more government alcohol sales in the Delhi NCR.
The committee said that similar steps have contributed to the elimination of monopolies in neighboring Uttar Pradesh. Revenue soared from Rs 17,320 billion in 2017-18 to Rs 23,918 billion in 2018-2019, a jump of 38 percent and a target of Rs 34,500 billion in 2021-22.
“States that have moved to a Beverage Corporation model saw an immediate increase in sales, indicating that the model is helping to get more goods into the control chain. In Karnataka, alcohol income has doubled in 4 years. Other states such as Rajasthan, Odisha and Andhra have also seen a similar trend in revenue collection, along with buoyancy in volumes, "the committee said.
Early reactions
The markets reacted with cautious optimism.
“Delhi's tax revenue has fallen by 40 percent this year and the allocation from the Union budget to the state has been static. Given the mounting pressure on sales in these unprecedented times of COVID, it is not surprising that the Delhi government, like so many other states, has turned to AlcoBev to meet their sales needs. We hope that the recommendations will significantly stimulate the sales structure in Delhi, ”said IP Suresh Menon, Secretary General of the International Association of Spirits and Wines of India (ISWAI) to MoneyControl.
The report recognized wrongdoing related to anti-branding in government sales. As a result, the overall market has become inefficient as there are no real market forces involved. The committee said that consumer choices will be denied and the market will be artificially shifted towards cheaper non-popular brands that are not consumers' choice. Many non-compliant companies have embraced corrupt practices which the committee said could result in a completely compromised supply chain in the near future, undermining Delhi's reputation for honest and business-friendly governance.
“IMFL's excise tax revenues for Delhi have stagnated for a number of reasons, primarily due to marginalization of popular brands, corruption and cartelization in the retail sector. The reforms proposed by the committee will address most of the issues we have been recommending for a number of years, ”Pramod Krishna, former head of the Confederation of Indian Alcoholic Beverage Companies, told MoneyControl.
The committee says in order to suppress the problem of unpopular brands in the first phase, moderate label registration is a must. “A high label registration fee can discourage the registration of such brands due to their financial inability to survive. The Delhi Label registration fee is enormous and by all standards the highest in India. In the neighboring states of Haryana and Uttar Pradesh, the fees for registering labels are by far reasonable. "
The committee said that the retail density / lakh of the population in Delhi is among the lowest and this needs to be changed. "Demand in Delhi is met by retailers in Noida and Gurugram." The distribution of the current retail network in Delhi is also not fair.
Sparsely populated regions have a significantly higher number of retail stores and vice versa. This creates demand and supply gaps that ultimately provide the opportunity and fuel for the movement and supply of illegal and non-dutiable alcohol.
The number of approved licenses in Delhi is 960. Uttar Pradesh has the highest number of AlcoBev sales in India (27,300). Delhi has seen no increase in retail sales since 2016, despite a diverse population growth (including the floating population).