Why prohibition doesn’t make economic sense

Banning booze is apparently earning votes. But what about humongous revenue loss – not to mention hooch tragedies?

Bishan Kumar | June 21, 2016


#Kerala   #Tamil Nadu   #Narendra Modi   #Gujarat   #Alcohol   #Liquor Ban   #Nitish Kumar   #Bihar   #Jayalalithaa   #Booze Ban   #Jalil Mastan  


These days K Babu, the controversial excise minister in the previous United Democratic Front government in Kerala headed by Oommen Chandy, cannot control his anger and frustration. Reason? He became the fall guy for supporting liquor ban in the state as voters rejected him and he lost his Thrippunithura seat, which had sent him to the house for four consecutive terms.

“I am the biggest victim of the closure of liquor bars in Kerala,” laments K Babu.

The ‘new liquor policy’ of the Chandy government had closed 700-odd bars in the state and the UDF had used it as a major campaign plank in the assembly election, hoping to win over a large chunk of women voters a la Nitish Kumar in Bihar. Sadly, this plank did not work and CPM-led Left Democratic Front routed Chandy and his men in the elections.

With several assembly elections round the corner, the protagonists of prohibition will force some political parties to include the booze ban in their manifestos. Nitish has already raised this flag in Uttar Pradesh, though Akhilesh Yadav has rebuffed him. Reason for it is not difficult to seek: excise is a big money earner for the state which is cash-strapped and needs all the money to fund its populist schemes to win next election as well. In a blind hurry to usurp power, these politicians fail to realise that prohibition has not been successful in any part of the world.

Let’s first find out how much revenue liquor brings to the coffers of different states.

As per an estimate, the wet states get about 20 percent of their tax revenues from liquor sales. And this revenue keeps rising every year as states keep increasing their excise revenue targets and keep on increasing duties/fee on liquor and licences. 

According to liquor industry association sources, as per a rough estimate, the states and union territories where prohibition is not in force collectively earn approximately Rs 40,00,000 crore a year through excise duty and sales tax on the sale of liquor. If we take into account the indirect revenues on the taxes paid on packing material and several other service charges paid by liquor manufacturers, the amount will go much higher.
 

Therefore, the question before the states is how to make up the massive shortfall in revenue if they opt for prohibition. For example, Kerala which is going for a phased prohibition in 10 years had reportedly picked up Rs 9,000 crore from liquor sales and taxes in a 2014-15,  a massive one-fifth of the state’s revenue. Tamil Nadu gets richer by Rs 25,000 crore and Andhra Pradesh (now Telangana and AP) by Rs 20,000 crore per year.

In Karnataka, where the government is in the wholesale business, the excise revenue is currently around Rs 15,000 crore, which is 20-21 percent of the state’s total earning. Interestingly, Karnataka has gone a step further in boosting its excise revenue. It is penalising the bar-cum-restaurants which failed to sell a minimum of 468 litres of liquor every month. The state excise department has slapped fines, totalling crores of rupees on over 150 bar-cum-restaurants in Bengaluru. Over 30 premium establishments have moved the high court against the penalty.

West Bengal’s excise revenue has been growing each year – from Rs 2,100 crore in 2012 to Rs 3,000 crore or more in 2015-16. However, excise figures alone do not show the whole picture, as the industry estimates put sales tax revenue from potable alcohol at Rs 1,400 crore for 2015-16.

The alcohol taxation statistics are pitifully inadequate and complex, as the liquor revenue goes to many accounts and in many departments, such as excise and commercial taxes. Sales tax, excise duty, import fee and education cess are some of the various forms of alcohol revenue. Therefore, in real terms, the actual revenue generated from taxing the production, sale and consumption of liquor is much high than the declared excise revenue figures of the states.

Though the states love to denounce liquor makers and sellers, there is no end to their greed for more earnings from this so-called sin industry. Each year, they increase charges of label registration of brands, licence fees for retails and bond, etc. to get more out of the liquor sector.

Take the case of Uttar Pradesh, where the government has set the excise revenue target of Rs 19,250 crore during 2016-17, which is 10 percent higher than Rs 17,500 crore revenue earned in 2015-16. Similarly, Odisha has fixed its annual excise revenue target at Rs 2,600 crore after increasing VAT on alcoholic products from 25 percent to 35 percent in December 2015. This would generate an additional Rs 140 crore per annum for the state.

Though there is a growing demand from certain quarters to impose a complete ban on liquor, majority of the states are not falling for the populist move. For example, the Maharashtra government is in no mood to follow Gujarat and Bihar as its leadership has realised that prohibition would have major financial implications. Its total revenue from liquor is pegged at Rs 20,000 crore.

Other states would also not like to opt for the liquor ban. Some reports from Kerala hint that the new government is not very keen on pursuing the policy of prohibition and might lift the partial prohibition currently in force.

Now, let’s examine the ground reality of liquor ban in Gujarat.

It is believed that illegal liquor sales in Gujarat amount to a whopping Rs 12,000 crore annually. On paper, Gujarat is a dry state but the reality is that there is no dearth of booze in Gujarat. Every city and taluka has friendly bootleggers, willing to do door delivery of your favourite drink. While the state keeps losing money each year, liquor mafia, police and prohibition officials and politicians keep minting money. This a major reason why nobody will let prohibition to be lifted even if it has been certified as the biggest fraud Gujarat has played on Mahatma Gandhi.

Another worrisome aspect of prohibition in Gujarat and elsewhere is the thousands of deaths due to hooch consumption every year. Close to 4,000 people lost their lives in the country by consuming spurious liquor during 2012-15.

In the past, spurious liquor tragedies in Gujarat led to the setting up of inquiry commissions. The justice Miyabhoy and justice Dave inquiry commissions had recommended scrapping of prohibition. Successive chief ministers washed their hands of the recommendations. The result: nothing has changed on the ground, and nothing is likely to change because the unholy politician-bureaucrat-police-liquor mafia nexus ensures that the wheels of the parallel illegal liquor economy keep running.

Apart from Gujarat, other states riding the prohibition bandwagon are Nagaland, Bihar, Kerala and the union territory of Lakshadweep. However, in contrast is the case of Mizoram which after 18 years of prohibition has allowed its residents to buy alcohol again. In 1997, the state passed the Mizoram Liquor (Total Prohibition) Act, banning the sale and purchase of all forms of liquor. But in 2013, the state government amended it to permit the sale of a fixed monthly quota of liquor to those holding permits. And in January 2015, prohibition was finally lifted in Mizoram.

Mizoram’s finance minister Lalsawta said recently, “We lost revenue and people drank bad liquor and fell sick.” Those acquainted with the state reveal that prohibition drove many young people to use dangerous narcotics, which are smuggled from neighbouring Myanmar and are easily available in Mizoram.


Kumar is editor-in-chief of Spiritz, published from New Delhi.

(The column appears in the June 16-30, 2016 issue)

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