Create a common market for liquor

Irregularities in award of liquor licences in India crop up with depressing regularity. An inordinate share of state governments’ revenues depend on taxes imposed on liquor, and that leads to a tendency to over-regulate the sale of potable alcohol. Control mechanisms run the gamut from state monopoly to tightly controlled competitive markets for retailing liquor. Experience, however, shows that almost every form of regulation is subverted. This is apart from prohibition, which pushes liquor sales underground and puts the health of citizens at risk, as evident in avoidable recent tragedies in Bihar and Gujarat. There is also the matter of differential tax rates across states that creates opportunities for smuggling. The scope for regulatory capture in the liquor sale business is unusually high and unnecessarily so.

Another demerit product, tobacco, does not inflict as much damage to the regulatory fabric because of the approach to regulation. States get a share of high taxes on cigarettes through the goods and services tax (GST). The GST mechanism eliminates cost arbitrage among states and can, with some modification, accommodate outright ban on sale if individual states wish to impose it. States’ reservation on loss of revenue from sale of liquor can also be overcome through some coping arrangement.

Creating a common market for liquor with an opt-out clause for states that decide on prohibition would offer a more holistic approach to regulation than that imposed by the states themselves. Uniformly high tax rates nationwide can serve as deterrence without allied policing complications of having states trying to micromanage almost every link in the chain. GST has self-policing built in that should help improve tax revenue buoyancy from liquor. The principal objection to bringing liquor sales into GST – the amount of tax revenue it fetches states currently – loses its salience with overall improvements in GST collections. The approach to regulating liquor consumption can benefit by seeking solutions in the market, and GST is an eminently capable tool.