PROHIBITION has always been an important subject of discussion between politicians and civil society organisations in Tamil Nadu. Successive State governments have been accused of promoting the liquor trade to raise revenue to finance its subsidies on food and services of many public utilities. Several aspects of this sector are mysterious to many and some of these can be attributed to the arbitrariness of the main players and the opaqueness in the transactions between the major players in the production and distribution of liquor. To understand this arbitrariness and opaqueness, we need to unravel the growth of this sector and the changes in the control systems as laid down in the statute of the State.
No doubt the tax revenue from the liquor trade has been growing at a brisk pace year after year, irrespective of the rise and fall in the growth rate of the State economy. Table 1 shows that the growth rate of the overall tax revenue from liquor (column 5) has always been higher than the growth rate of the State economy (column 7) from 2004-05 to 2012-13. This is the speciality of the liquor tax and that is the reason why the State government banks on this to finance its burgeoning public expenditure.
Prohibition in Tamil Nadu has always been partial, allowing only Indian Made Foreign Spirit (IMFS) and beer for both production and consumption in the State. One of the arguments for higher tax rates on liquor is that it is a deterrent to higher liquor consumption. Contrary to this belief, the deep-rooted general opinion is that the consumption of liquor in the State has been continuously increasing and tax is not a deterrent here. Table 2 shows the annual growth in the production of IMFS and beer and the male population above 18 years. This is an illustrative exercise.
We generally assume that children below the age of 18 and women do not drink liquor and that they form hardly any consumer base for liquor. Hence, we compare the rate of growth in the supply of liquor with the growth rate of the male population above the age of 18, and we find that the growth rates of the supply of IMFS and beer have remained higher than the growth rate of the male population above the age of 18. This means that in spite of an increase in price due to both production costs and higher tax rates, the annual per capita liquor supply ought to have increased manifold and hence acted as a strong force behind the higher growth rate of tax revenue from this source.
The success of cost-effective tax collection from the liquor trade is attributed to the system of the liquor trade centred on the State-owned enterprise TASMAC, or Tamil Nadu State Marketing Corporation Limited. TASMAC was established in 1983 with an investment of Rs.1,500 lakh from the State government and incorporated under the Companies Act, 1956. The objective of TASMAC was to curtail the sale of spurious liquor, and the wholesale trade in liquor was transferred from private entities to TASMAC, thus it emerged as a monopoly of wholesale trade in liquor. Exactly after 20 years since the inception of TASMAC, in 2003, even the retail trade of liquor was transferred to TASMAC with the objective of curtailing excess pricing and removing unfair trade practices in the retail trade. Seemingly, the unintended consequence of the establishment of TASMAC and the subsequent expansion of its activities was the growth in tax revenue from the liquor trade. Obviously, successive State governments have strengthened this institutional mechanism.
Table 3 gives us a glimpse of the financial position of TASMAC in two recent years. With just Rs.1,500 lakh as capital, it was able to achieve a total revenue of Rs.21,96,602.40 lakh in 2011-12 and Rs.25,31,366.86 lakh in 2012-13. This turnover is roughly 1,600 times the capital. This is truly a lucrative business. In spite of this huge turnover and the company being a monopoly for more than a decade in the liquor trade, TASMAC is a loss-making company today. For instance, in 2012-13 it incurred a net loss of Rs.9,936.16 lakh. In the previous year (2011-12) also, it incurred a net loss of Rs.147 lakh. A closer look at the broad trends in the major items of revenue and expenses reveals a clear picture of this state of affairs in TASMAC.
Table 3 shows that in 2012-13, nearly 96.3 per cent of TASMAC revenue was operating income, that is, mainly from the sale of liquor. The cost of purchases of liquor was only 62.3 per cent of the total expenses and there were other expenses such as salary and taxes. We find TASMAC, as a company trading in liquor, should obtain licences to run its wholesale and retail outlets and to import foreign liquor. Further, TASMAC as a wholesale and retail trader should pay sales tax (VAT). The total amount of fees and sales tax paid to the State government was Rs.11,27,670.80 lakh, which is 82.4 per cent of the value of IMFS and beer purchased and 44.4 per cent of the total expenses. TASMAC gave away Rs.19,510.99 lakh as salary and wages to its employees in 2012-13. In 2012-13, it had 27,270 employees, of whom 26,913 were temporary employees and the remaining were permanent employees and others. On an average, each employee’s compensation was Rs.6,000 a month.
At the end of the day, we find, TASMAC is able to achieve a high turnover to capital ratio; that is, the amount of trade per rupee of capital invested by the State government is phenomenally high. Hence, TASMAC, instead of contributing to the State treasury by earning profits and dispensing dividend to the State government, has actually helped in realising tax revenue from the liquor trade with little leakage.
There is a general opinion that TASMAC is a major tax revenue collector for the State government. The Comptroller and Auditor General’s (CAG) report on State finances for 2011-12 states, “Nearly 98 per cent of the total excise revenue is realised through Tamil Nadu State Marketing Corporation (TASMAC).” But the annual financial reports of TASMAC do not give the details of the excise duty it has collected. The value of purchase of goods reported in the annual reports of TASMAC should be inclusive of the excise duty and other fees that the manufacturers of molasses, rectified spirits and IMFS and beer in the State pay.
There is an elaborate administrative machinery to monitor the production of these items in various sugar mills, distilleries and liquor producing units. Almost each of these factories has an official, either a distillery officer or an excise supervisor, who monitors production and collects the State excise and other fees payable by the factory. There is a district level Deputy/Assistant Commissioner to monitor this sector and the Commissioner of Prohibition and Excise is assisted by Joint Commissioners and Assistant Commissioners at the State headquarters.
EXCISE DUTY ON LIQUORWe have already noted that TASMAC bought Rs.13,68,140.42 lakh worth of goods in 2012-13. This amount should include the excise duty on liquor production paid by liquor producers. Excise duty is a specific tax; that is, the tax is expressed as rupees per unit of liquor. We cannot calculate the excise duty portion of the value of total purchase of liquor by TASMAC. We do some rough calculation in this regard at the cost of accuracy.
Normally, the Commissionarate of Prohibition and State Excise publishes the details of the total excise revenue collected and its components. We have such data for the years up to 2010-11, so we take that year as a reference period to calculate the excise duty paid by the manufacturers.
The value of total purchases by TASMAC in 2010-11 was Rs.7,82,946.59 lakh and the excise duty collected in that year was Rs.3,44,215 lakh. Deducting the excise duty from the value of the liquor purchased, we get Rs.4,38,731.59 lakh as the approximate factor cost of liquor and the excise duty paid was 78 per cent of the cost of liquor. The value of total liquor purchased by TASMAC in 2012-13 was Rs.12,35,342.44 lakh and assuming 78 per cent of it was the excise duty paid, then the net value of liquor purchased was Rs.6,94,012.61 lakh. Even this cost of liquor should include the various fees that the manufacturers of molasses, spirit and IMFS and beer have paid to the State government. In the absence of disaggregated data we accept this as the factor cost of liquor for calculation purposes.
In Table 4, we have compared the sales tax remitted by TASMAC as given in its annual reports and the sales tax revenue from the liquor trade as reported in Policy Note 2014-15 of the Department of Prohibition and Excise, Government of Tamil Nadu.
The sales tax revenue remitted by TASMAC is only less than 50 per cent of the total sales tax on liquor collected by the State government. Though TASMAC is a major revenue collector for the government, there are other channels through which the sales tax on liquor is collected. For instance, the first point sales tax on liquor is 58 per cent and the second sale attracts 38 per cent. The sales tax is 14.5 per cent at the third level. For imported liquor, the first stage attracts 58 per cent and the second stage 14.5 per cent of sales tax. There are many non-proprietary clubs and hotels where liquor is served and they also pay vend fees and sales tax on liquor. Up to 2011, 872 such licences were issued and in terms of application fee, licence fee, privilege fee and security deposits, a total revenue of Rs.2,341.13 lakh was collected. We have no information about the sales tax that these licensees paid. Remember that TASMAC paid only 46 per cent of the total sales tax on liquor and, therefore, the remaining 54 per cent could be paid by these 872 licensees.
The Handbook of General Statistics issued by the Commissionarate of Prohibition and Excise showed that a total of 6,785 shops were owned by TASMAC and a total privilege fee of Rs.2,50,100 lakh was collected. Thus, 6,785 liquor shops under TASMAC paid 46 per cent of the sales tax and the seemingly 872 other licensees paid the remaining 54 per cent. We need some more information, which we could not access about the disproportionate contributions from the two sources.
Our analysis of State excise and sales tax on liquor and other fees collected from manufacturers and vendors shows that unless we get the actual factor cost of liquor, we cannot estimate the tax burden on the consumers of liquor. The sales tax rates are ad valorem in character, where the tax is expressed as a percentage of the sale value of the product; the excise duty is specific in character and is expressed as an amount per unit (volume) of liquor. This has resulted in multiple excise duty rates and made tax collection complex. Even the vend fee, the special fee, and the special privilege fee are expressed as rupees per unit of liquor or is a single flat fee. Instead, if the State excise duty on liquor is also expressed as an ad valorem rate, then the growth in the cost of production should automatically take care of higher tax collection and the tax administration will be more transparent and simple.
Liquor manufacturers in the country argue for including liquor in the proposed Goods and Services Taxes (GST), which both the Union and State governments are contemplating to introduce in the next couple of years. The GST will combine the excise duties and the sales tax on liquor. It will effectively zero the tax on export of liquor from one State to another, and thus the entire tax revenue will accrue to the liquor-consuming State. But the problem that the State governments visualise is the loss of revenue owing to a lower tax rate. Combining roughly 78 per cent of State excise and more than 60 per cent of sales tax on liquor in Tamil Nadu would mean nearly a 200 per cent effective aggregate tax rate on liquor. This should be reduced to less than 20 per cent under the GST. Of course, there will be substantial loss of revenue if the States agree to bring liquor under the GST. But there is no argument against implementing a transparent and ad valorem type of tax on this commodity.
Production and Distribution ChainThe main activity of the Department of Prohibition and Excise is to implement the Tamil Nadu Prohibition Act, 1937; issue licences for production and distribution of molasses, spirit and liquor; and collect excise duty and the fees set under the various rules framed under the Act. Several sets of rules have been framed to regulate the production and distribution of molasses, IMFS, beer, spirits, rectified spirit, and wine and the vending of all these items.
There are 27 private, 16 cooperative and three public sector sugar mills which produce molasses. This molasses is supplied to 17 private and two cooperative distilleries for the production of spirits. Some amount of molasses is also exported to other States and used in the production of ethanol in eight ethanol-producing distillers in the State. In the private sector, there are 11 producers of IMFS, seven producers of beer and one producer of wine, to whom spirit is supplied for use as a raw material. Thus, the State government controls the quantum of production at each level from molasses to alcohol and also their use and distribution among producers.
Although the application fee, the deposit and the licence fee for obtaining a licence for manufacturing different types of spirits, IMFS, beer and wine are clearly laid down by the State government, we do not have clear guidelines that set the procedures for sanctioning such licences. We also do not have any information in the public domain about the number of applications received every year in this regard.
The CAG’s report for 2011-12 states: “… the distilleries, IMFS and beer manufactory licences were granted based on the applications received from the intended persons/companies without adopting any other procedure like inviting application through public notice/issue of notification. The auctioning of these licences was also not done and there was lack of transparency in granting of licences. Further there is no provision in the Act/Rules for levy of fee for expansion of the existing production capacity.… We recommend that a transparent system may be evolved for issue of privilege and licence for new manufactory and fixation of privilege fee for expansion (of) units.”
Almost the entire quantum of final products of alcohol manufactures, namely of IMFS, beer and wine, is bought by TASMAC. Some amounts of spirit and alcohol are supplied for industrial and religious uses. TASMAC places orders with different manufacturers for various types of alcohol based on its own assessment of the demand for such products. Except for import from foreign countries of a few varieties of liquor for consumption of foreign travellers and customers in star hotels, it does not import liquor from other States in India. There seems to be a case for arbitrariness in deciding the demand for various brands of liquor and subsequent placement of orders with liquor manufacturers. The CAG report of the Department of Prohibition and Excise for 2011-12 (Table 5) gives the demand for liquor from six major manufacturers.
The wide variation in the demand placed with the manufacturers by TASMAC—consequently the factories are working at less than full capacity, sometimes at less than one-third of the installed capacity— strengthens our apprehension about arbitrariness in placing demand with the manufacturing units. With fixed prices for various brands of liquor, TASMAC, as a monopolist, places various quanta of products on sale and effectively that forms the basis for consumers’ demand. In a case relating to the arbitrariness of TASMAC’s demand orders to the manufacturers, Justice V. Dhanapalan of the Madras High Court said that the choice of the consumer could vary on the basis of the brand and quality of the liquor and hence TASMAC retail outlets should stock all brands as per the customer’s requirement. Besides, Justice Dhanapalan also observed that TASMAC must be fair in its approach and formulate a set of guidelines for issuing orders and indents ( Business Standard , March 14, 2014). Even the procurement prices of liquor are set by the government from time to time through government orders.
Obviously, the existing arrangement does not encourage competition among manufacturers to produce a wide variety of products and at low costs. For any given sale price, if the cost of production is reduced, inclusive of excise duty, then the State government can get a larger share of the difference between the purchase price and the sale price as tax revenue. Further, the narrow range of products available for the consumers could also be a reason for restricting them to buying high-cost liquor instead of cheap and less intoxicant variants. Liquor manufacturers and manufacturers of inputs such as molasses and spirit are controlled through licences, grant of permission to export products and divert inputs for the production of liquors and ethanol, the placement of demand from TASMAC, the fixation of the cost price of liquor, and the levy of fees, excise duty and sales tax. Many of these regulations stifle competition and enterprise in this sector.
One of the reasons for not importing liquor from other States could be that if the entire alcohol requirement is met from local liquor manufacturers, the State government can get the entire excise duty from such production. Optimal tax revenue can be achieved only if the tax rates are just and there is competition in the market, which ensures that the producers provide the products at the lowest cost. We can neither justifiably ascertain the effective tax rates because of the multiplicity in the tax system nor is there perfect competition in the liquor market.
On the whole, the State government functions as a regulator of the liquor trade, in which it is the only seller. It regulates the sale of liquor through the levy of fees and the sales tax. The production of liquor and other ingredients is controlled through the issue of licence and the levy of fees and excise duty. Though the entire commodity tax system in the country has moved to ad valorem followed by VAT, we have specific excise duty rates for liquor, wherein the rupee value of this product is clearly available as liquor manufacturing is an organised sector. The implementation of the licensing system enlarges the scope for the regulating department to be arbitrary and opaque in its activities.
There is also a case for conflict of interest. On the one hand, the Commissioner of Prohibition and Excise must implement the Tamil Nadu Prohibition Act, 1937, to control the production and consumption of liquor, and as a director of TASMAC, he/she must contribute to the decisions for this commercial organisation to expand its business. Thus, the Commissioner of Prohibition and Excise is both the only seller of liquor and also his/her own regulator. It is high time the arbitrariness and opaqueness involved in the same person playing dual roles were done away with and these roles were assigned to separate bodies. The role of the regulator should be assigned to a legal authority.
R. Srinivasan is Associate Professor in Econometrics, University of Madras. seenu242@gmail.com
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