GST, the “one nation one tax” system has made doing business easier. Many products now fetch lesser price, hence benefitting the consumers. The soul of GST is the Input Tax Credit (ITC), which is received on goods and raw materials that are imported by one state from another. Previously, the inter-state imports of goods were taxed under Central Sales Tax (CST). Now, the businesses dealing in goods can claim ITC on services also. This cross utilisation of ITC has become a game changer in trade and economy. But one industry that has been overlooked by the government is the liquor industry.
Liquor for human consumption is specifically excluded from the GST regime, hence it is placed under VAT. This was done to provide flexibilities to the states to maximise the revenue in times of emergencies. But it is having an adverse effect on the industry, especially in case of Goa.
The liquor industry uses alcohol, barley malt and glass bottles as raw materials, which are imported from others states, and other packaging materials like labels and corrugated boxes are purchased locally. In pre-GST regime, the raw materials that were purchased inter-state, were taxed at 2% CST, and no ITC was availed on them. The materials purchased locally, could avail ITC.
Now in the GST regime, the raw materials are taxed at the GST rates, while the final product, liquor, are taxed under VAT. The major raw material, ethyl alcohol, ironically is taxed at 18% GST rate, while liquor is taxed at 22% VAT. But the most petrifying fact for the liquor producers is that there is no Input tax credit available to them on the final product, as it is excluded from the GST. So there is an incidence of double taxation, on the raw materials and the final product.
This will ultimately raise the cost of production. The big producers, who have a larger scale of production, can absorb the cost shocks for a longer time, to retain the market share. This drives out the small producers from the market.
The Goa Excise department also charges excise duty on the liquor on slab basis. For example, a bottle with an MRP of Rs 90 (750 ml), the duty is Rs 20 a litre. When the MRP rises above Rs 90, up to Rs 175, the duty is Rs 60 a litre. As the cost of production will rise due to the double taxation, it will automatically raise the MRP of each bottle, which will attract more excise duty. This will spiral down to excruciatingly high prices, ultimately hitting the consumers hard.
The defense of the whole debate boils down to two points. First, higher prices will deter consumption and second this system will raise state government’s revenue. But the consumption of goods like alcohol, which are addictive in nature, does not respond to higher prices so easily. People don’t bring down consumption with higher prices and hence money is diverted from major necessities, towards liquor, especially for poorer households.
Secondly, higher taxation leads to higher revenue, but it might increase the consumption of illicit liquor and create a black market. This happened in the State of Kerala, when there was a state ban on liquor. This will induce higher administrative and policing costs.
It is not at all a win-win situation, to keep liquor out of the GST regime. But we all know, good politics always trumps bad economics.
