The ‘seconds’

OVER the decades, the stranglehold of the liquor lobby on the polity in Karnataka has resulted in governments not being able to plug large-scale duty evasion and maximise revenue collection from this sector. This view was even voiced by the Tax Reforms Commission. The biggest culprit was “seconds”, Indian made (foreign) liquor (IML) on which no excise duty had been paid. Also, with the excise rate for liquor sold inside the State much higher than the export levy on liquor shipped out, seconds liquor was marked up for export but it never actually left the State. Thanks to “seconds”—industry watchers reckon that at certain times as much as half of all the IML manufactured in Karnataka may have evaded excise duty—IML companies were able to enrich themselves with tremendous piles of unaccounted cash, which was then used to buy political patronage.

As Chief Minister in 1989, Veerendra Patil attempted to stem the flow of “seconds” by raising the State export levy from Rs.2 to Rs.20 a litre, and passed a law requiring manufacturers to sell their liquor only to the government distributor, Mysore Sales International Ltd (MSIL). This meant that non-excise-paid IML could no longer go straight to the retailer. Patil also banned the sale of toddy much to the delight of the arrack lobby. The move hit the IML lobby, and with sales plummeting, the Khodays sued the government for infringing on “the fundamental right of the parties to carry on trade or business in liquor”, a case that was eventually dismissed by the Supreme Court.

Patil suffered a stroke in September 1990 and hardly a week later Congress president Rajiv Gandhi flew down to Bangalore, called on Patil, and just before departing for Delhi announced to a shocked press that the State would have a new Chief Minister. Patil’s successor Sarekoppa Bangarappa lowered export duties, cut taxes on beer and re-legalised toddy. He also controversially rehabilitated an IAS officer who had been tainted by the “bottling scam” (where major arrack bottling contracts were given to unknown figureheads who were the benami for influential politicians and contractors) and made him Finance Secretary, where he controlled excise once again.

“Seconds” were back in business and it was not until 2003, during the chief ministership of S.M. Krishna and in an era where other businesses lobbies, mostly notably education, granite, real estate and, of course, IT had begun to match the liquor lobby’s clout that the State was able to stymie this revenue-sapping practice.

With various administrative measures having failed, Krishna in 2003 initiated a set of reforms, which broadly consisted “of reduction and rationalisation of the excise duty structure, simplification of procedures and establishment of a government-owned distribution company for canalisation of IML, beer and spirit”. In June 2003, Karnataka State Beverages Corporation Ltd (KSBCL) was formed as a private limited company of the Government of Karnataka and with the purpose of channelising the sale of liquor in the State. Manufacturers, both within and outside the State, have to keep their stocks at the corporation’s godowns across Karnataka for distribution (in the early years to wholesale licensees but with the abolition of the wholesale business in June 2006, to the retail and other licensees like MSIL). To sustain its activities, KSBCL collects a government-prescribed margin on goods transacted, fines manufacturers if stocks are not lifted in a specified time, and functions as the de facto distributor of liquor. Initially, KSBCL’s distribution was confined to IML and beer, but in September 2004 the government entrusted a total canalisation of rectified spirit to the corporation. The KSBCL today operates through 56 liquor depots spread across the State, and conducts its spirit operations through 38 depots that have been established in all the functioning primary distilleries.

According to Vijay K. Rekhi, former Chairman, Confederation of Indian Alcoholic Companies, Karnataka has cherry-picked and imbibed the best practices of all the State corporations and evolved a good system of distribution. “KSBCL doesn’t discriminate by having a preference for certain owners or brands. It only goes by the velocity of the brand. Manufacturers also have the freedom to launch new brands and to take prices up or down.”

Ravi Sharma