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Taxation of Liquor

Liquor taxation is a major source of revenue for governments around the world. Taxes on liquor can be levied at different stages of the supply chain. Know more

Taxation of Liquor 

Liquor remains subject to taxation despite its exclusion from the Goods and Services Tax (GST). Key taxes affecting liquor prices include Excise Duty, Value Added Tax (VAT), and other levies. Governments worldwide impose taxes and stringent regulations on the sale of alcohol. These measures, combined with local licensing fees and state-level controls, significantly inflate the cost for consumers, often resulting in prices several times higher than those at the distillery.

For example, since 1961, the state of Gujarat has completely prohibited the sale and consumption of alcohol, while Puducherry, a region on the Coromandel Coast, heavily relies on alcohol sales for revenue. Some states have established their alcohol monopolies, while others conduct auctions for retail and wholesale licenses. One such state with a monopoly is Tamil Nadu, boasting over 6,000 outlets and providing employment to more than 30,000 individuals in the alcohol industry.

GST on Alcohol 

The taxation of alcoholic beverages in India follows a system where the Central government does not impose taxes on drinkable liquor; instead, it is the state governments that tax these products. Many liquor producers express concerns that these taxes significantly reduce their profits

In India, alcohol is not subject to the Goods and Services Tax (GST), but its production involves taxed raw materials and associated costs, including items like barley, denatured alcohol, molasses, and glass bottles. These materials are subject to tax rates ranging from 18% to 28%, impacting liquor producers who must bear these tax burdens. Increasing prices could potentially harm their sales and overall revenue. Additionally, prior to the GST Act, there was a 15% service tax on transportation and freight costs, which has since risen by 3% under the GST Act. Although there haven’t been major changes in Value Added Tax (VAT), the prices of such alcoholic beverages have still increased

The profitability of alcohol producers is threatened by the presence of numerous low-quality brands in the market, as consumers opt for more affordable options over expensive, high-quality ones. Consequently, state governments face significant reductions in their revenue due to declining profits from alcohol sales.

Costing of Liquor  

  • Taxes: Taxes are the biggest component of the cost of liquor in India. State governments levy excise duty on liquor, while the central government levies additional excise duty (AED). The total tax burden on liquor can vary from state to state, but it is typically around 70-80% of the retail price
  • Production costs: The production costs of liquor include the cost of raw materials, such as molasses, grain, and water, as well as the cost of labour, energy, and transportation. Production costs vary depending on the type of liquor being produced, but they are typically around 10-20% of the retail price
  • Profit margins: Liquor manufacturers and retailers typically earn a profit margin of around 10-20% of the retail price.

Industry Analysis 

The Indian liquor industry is one of the largest in the world, with a market size of over ₹2.8 trillion ($38.4 billion) in 2021. The industry is expected to grow at a CAGR of over 8% during the forecast period 2021-2027, driven by factors such as rising disposable incomes, changing lifestyles, and a growing young population.

The Indian liquor industry is dominated by Indian-made foreign liquor (IMFL), which accounts for over 70% of the market. IMFL is a type of liquor that is produced in India using imported ingredients. Other segments of the Indian liquor market include beer, wine, and country liquor.

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