The reversal comes after the Delhi Police’s Economic Offences Wing launched a probe alleging irregularities in liquor licence distribution. The policy flip-flop is disastrous for private sector vendors, will dent revenues including licence fees for the government, and fuel black marketing.
States regulate alcohol consumption through licensing of production and sale, and levy of state excise. Liquor store regulation is as distinct from liquor store ownership by the state as cocktail is from Molotov cocktail. States that have a monopoly over wholesale and retail sales of liquor (like Tamil Nadu) must open up the sector, while ensuring robust oversight, not throw the whisky with the soda water.
The excise duty on alcohol accounts for around 10-15% of own tax revenue in most states. Bootleggers grease the palms of law enforcers, excise authorities and local politicians. The higher the excise duty, the larger the gain from evasion, the higher the incentive to dodge and the bribes to be paid. Prohibition drives the trade underground. So, wiping out the illicit liquor industry calls for states to steeply cut excise duty.
A superior solution is to bring alcohol under GST. The tax captures value addition in the production chain, creating audit trails that can end illicit liquor trade and tax evasion. States could retain the power to legislate on aspects relating to liquor, and include a moderate, non-VAT element of sin tax to allay their fears over the revenue loss.