Skewed duty structure affecting Karnataka

Harmonisation of excise duty structure in Karnataka will be a win-win situation, both for the state government as well as consumers. This harmonisation measure, besides helping Karnataka to get additional revenue, will also give consumers access to spirits of their choice at better price points within the state.

Excise duty on alcoholic beverages is undoubtedly a major source of revenue for several state governments in India. But skewed duty structure and inconsistencies in excise policy by some state governments in India are not only denting their excise duty collection potential but also discouraging responsible drinking amongst masses.

Further, the skewed excise duties, besides making cheap alcobev segments cheaper, has made value/ premium segment of alco-beverages in India exorbitantly expensive. This essentially implies encouraging abusive & binge drinking habits at lower price bracket and forcing consumers of value / premium segment to think of alternate sourcing from other geographies & channels owing to high price point/s of their preferred alcobev brands in their state.

The Sorry State of Affairs

The classic case of this paradox is Karnataka which sells one of the highest numbers of bottled alcoholic beverages in South India but lags severely behind in per case excise revenue collection as compared to many other states. For the financial year 2019-20, sale of spirits in Karnataka was at 60.09 million cases and the state’s excise collection stood at Rs. 21,584 crore, while in the case of Telengana, 34.88 million cases of alcoholic beverages were sold during 2019-20, with excise collection standing at Rs. 22,210 crore in the same fiscal.

This clearly shows that Telangana which sold almost half the IMFL of Karnataka during 2019-20 (34.88 million cases or 57 percent of Karnataka’s sale of IMFL in 2019- 20), still garnered 13 percent higher revenue (Rs. 26,401 crore) than Karnataka (Rs. 23,332 crore) in 2019-20. Karnataka sold 58.32 million cases of IMFL during 2019-20.

It is evident from the statitics that Karnataka promoted low-end liquors, which were offered at incentivised tax rate and discouraged consumers to access popular and premium alcobev brands by taxing them the highest in the country.

Alcohol industry veterans stated that this scenario was due to the fact that spirits sale for low- end alcoholic beverages in Karnataka is very high as compared to any other major state in the country, thereby contributing to lower per case revenue for the state.

On the contrary, popular and premium IMFL brands, which have high sale potential in the state, are witnessing muted sales in Karnataka, owing to very high excise duty in the state. Segment wise spirits sale data reveal that cheap + regular category of alcoholic beverages accounted for 93  percent of total spirits’ sales in Karnataka, while value + deluxe + premium category of alcoholic beverages accounted for a miniscule 7 percent spirits’ sales. On the contrary, in Telangana, cheap + regular category of alcoholic beverages accounted for approximately 49 percent of total spirits’ sales, while value + deluxe + premium category of alcoholic beverages accounted for 51 percent of total sales of spirits in Telangana.

Looking at excise duty levied across different segments and states reflect the high skewness in excise duty structure in Karnataka. The table explains the skewness and the resultant price of spirits across the five southern states of India.

The table I provides data on volume of spirits sold in different southern states of India and excise revenues generated by their respective governments during 2019- 20. This clearly reveals that spirits’ sales in Karnataka was the second highest (only marginally lower to Tamil Nadu) among south Indian states during 2019-20, but the per case excise collection was the lowest in Karnataka among all southern states of India, during the same fiscal.