Long winding queues outside liquor shops in select areas across the country barring four States (Bihar, Gujarat, Manipur and Nagaland) and Union Territory of Lakshdweep have brought some cheer for local governments.

A study by Indian Ratings & Research (Ind-Ra), a Fitch group firm, revealed that 15 States get at least 10 per cent of their earnings through a pool comprising State Goods & Services Tax (SGST); VAT/sales tax on petrol, diesel and jet fuel; and stamp, registration and electricity duty.

In fact, the share of alcohol is more than 20 per cent for five States, including Karnataka and Rajasthan; 15-20 per cent for seven States, including Uttar Pradesh, Punjab and Madhya Pradesh; and 10-15 per cent for three States, including Andhra Pradesh and Odisha.

According to industry sources, States earn nearly ₹700 crore every day through the sale of alcohol. Initially, there was complete ban on the sale of liquor. However, many States demanded resumption of sales in a limited way, so that illegal sales could be curbed and revenue leakage plugged. Based on that, the Centre allowed sales with conditions such as standalone shops maintaining social distancing with not more than five persons at shops at a time.

States’ fiscal compulsion

Many State governments have allowed opening up of shops based on these guidelines. The Delhi government has listed nearly 150 shops out of over 800 to sell liquor from Monday.

According to DK Pant, Chief Economist of India Ratings, the lockdown since March 25 has resulted in States’ tax revenues drying up, and with committed expenditure such as salary, pension, interest and emergency health-related spends due to Covid-19, their financial position has weakened considerably.

Increased ways and means advances merely take care of the liquidity issue. The bigger problem is contraction in top line (revenue) of States.

“Among States’ own tax revenue — State excise (mainly from liquor) is the third largest source of tax revenue after SGST and State VAT (mainly petroleum products).

“At a time when economic activities have come to a grinding halt and reduced mobility has impacted the SGST and VAT respectively, liquor is the only option to give some relief to State finances,” he said.

Revenue break-up of States

The sources of State government revenue are SOTR (States’ Own Tax Revenue), share in central taxes, SONTR (States’ own Non-Tax Revenue) and grants from the Centre.

The average proportion (FY18 to FY20(BE)) of SOTR in revenue receipts is around 46 per cent; the same for share in central taxes, SONTR and grants is 26 per cent, 8 per cent and 20 per cent, respectively.

More than 90 per cent of SOTR is generated from five revenue heads — taxes on property and capital transactions (11.2 per cent), State VAT (mainly petroleum products, 21.5 per cent), State excise (mainly liquor, 11.9 per cent), tax on vehicle (5.7 per cent) and State Goods and Services Tax (39.9 per cent).

During the lockdown period, SOTR has declined significantly, barring some sale of petroleum products and State goods and services tax on non-discretionary spending.

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