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Deadly Taxes

The high ‘sin tax’ on liquor drives people to look for cheaper and unfortunately, fatal alternatives

It is that time of the year again where another hooch tragedy has occurred, the dead are counted, state compensation is given to the kin, few are arrested, political blame game ensues with no real consequences, and we move on till the next time the cycle repeats itself. The death toll this time has gone up to 97 and the opposition is demanding Maharastra Chief Minister Mr. Fadnavis’ resignation. An inquiry has been set up, the police claim that they have caught the main culprits and that justice will be meted out. Those caught will be tried and prisoned and within no time, others will take their place. The makers of hooch are suppliers of a commodity that is high in demand. This high demand for the illicit liquor makes it a profitable venture to produce the commodity. So long as the demand is high, the supply will exist.

The real question to ask then is regarding the cause behind the high demand for illicit liquor. One of the main reasons why the poor decide to drink illicit liquor is because they cannot afford to buy packaged, manufactured and regulated alcohol. There are different categories of alcohol available in India: the most expensive are the imported ones, which attract heavy import duty and other taxes, then, there is the Indian Made Foreign Liquor (IMFL), country liquor and finally, illicit liquor.

The customary police raid and destruction of illicit liquor bottles after the tragedy.

The customary police raid and destruction of illicit liquor bottles after the tragedy.

While the imported liquor and IMFL are firmly out of reach of the daily labourer’s budget, he often cannot afford even country liquor and it might not be easily available. Country liquor is produced in cottage industry type of setting and was recently brought into the regulatory fold. Many southern states have completely banned country liquor and others are beginning to impose strict regulation and taxing it heavily.

Like a typical patronizing welfare state, heavy taxes are levied on alcohol to prevent people from over-consuming the substance and thereby, prevent health hazards and societal evils. While the intention might be good, the outcome, as is the case more often than not, has not been desirable. A look at the Maharastra tax structure on liquor reveals the extremely high rate of tax levied on regulated alcohol. The excise duty on IMFL is 300% of manufacturing cost and on country liquor, the excise duty is upto 250% of manufacturing costs. It is these high tax rates that explains why large factories which enjoy significant economies of scale produce liquor which is more expensive than home-made liquor produced in small quantities.

The high rates of tax is levied by the government in order to make the relative price of alcohol higher than other products, which, in theoretical economics, should reduce the product’s demand. However, it is a known fact that high taxation on alcohol and tobacco products does not deter people from its consumption. Instead, they move to cheaper alternatives. Of course, the other reason for high taxation is that it continues to be a strong revenue earner for the various state governments. Nearly 10-15% of state government revenue comes from excise duty on liquor and another huge chunk from the tax on tobacco products.

While the government might feel that it is its moral obligation to levy a ‘sin tax’ on harmful products to prevent its use, it might not realize that its morality is driving people to illicit liquor and consequently, death.

P.S: For an excellent discussion regarding the ineffectiveness of using taxation to influence public consumption behaviour, read Catalyst’s post on “Taxing our way to better health“.

Anupam Manur is a Policy Analyst at Takshashila Institution. He sporadically tweets @anupammanur

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