On July 7, 2023, the Congress (I) government in Karnataka gave a jolt to the alcobev sector by hiking existing rates of excise duty on Indian Made Foreign Liquor (IMFL) by 20% and on beer from 175% to 185%. And within six months, the government has announced yet another increase to the beer industry. A draft notification of the government mentions that additional excise duty on bottled beer manufactured in Karnataka or imported into the state will be increased by 10 percentage points from 185% to 195%.

As per the notification, the hike would result in every 650 ml bottle to cost an extra ₹8 to ₹10. The government has proposed the hike in a draft notification to amend the Karnataka Excise (Excise Duties and Fees) Rules, 1968. The new rules allowing the hike are likely to be finalised this month or early February as the department is seeing ‘a big growth in strong beer sales’, even as summer is approaching.

Government desperate to raise revenues

The Congress (I) government is desperate to raise resources as it is not able to fund the freebies it offered to the electorate just before elections. The Congress party came to power on the five election guarantees (read as freebies) it offered to the people – free electricity up to 200 units; free bus travel for women; 10 kg rice for every member of a below poverty line (BPL) household; ₹3,000 every month for unemployed graduate youth and ₹1,500 for unemployed diploma holders; and ₹2,000 for every woman head of a family.

Five guarantees draining exchequer

These five guarantees are going to cost the newly elected Congress government headed by Chief Minister Siddaramaiah, a whopping ₹52,000 crores. Excise revenue is crucial for the state government. In the 2023-24 fiscal, Karnataka has set a target of earning ₹36,000 crore from excise.

Excise revenue registers 13.43 growth in 2022-23

As per the annual report for 2022-23 of the Karnataka Excise Department, the excise revenue has been steadily increasing from ₹7.11 crores in 1967-68 to ₹26,377.68 crores in 2021-22. In 2022-23 the excise revenue collected was ₹29,920.37 crores, an increase of ₹3,542.69 crores when compared to the previous year, registering 13.43 growth. It said that the department’s salary and other expenses was ₹247.88 crores which is 0.83% of the total excise revenue.

Source	2020-21	2021-22	2022-23
IML	20,217.80	22,889.10	24,663.85
Beer	2,438.16	2,757.30	4,460.60
License Fee	643.87	684.10	745.84
Others	32.27	37.18	50.08
Total	23,332.10	26,377.68	29,920.37

Source wise excise revenue in Karnataka

Excise revenue from liquor sales in Karnataka has seen a 65% jump over the last five years, increasing from ₹17,948.5 crores in 2017-18 to 29,920 crores in 2022-23. The revenue is estimated to double by March 2024, given the budgetary target of ₹36,000 crores from liquor sales, as enumerated in CM Siddaramaiah’s budget proposal.

Expenditure is just 0.83%

Of the total revenues realised the expenditure of the department is just 0.83% and that expenditure is also seeing a downward trend.

Particulars	2020-21	2021-22	2022-23
Revenue	23,332.10	26,377.68	29,920.37
Expenditure	222.87	234.43	247.88
Percentage of expenditure	0.96	0.89	0.83

The department also reported growth in sales of both IML and beer (in lakh carton boxes). It can be seen from the statistics that beer has seen a quantum jump from 2021-22 to 2022-23 from 22.40 lakh carton boxes a month to 32.5 lakh carton boxes a month respectively, indicating the growing trend for beer, particularly strong beer.

Liquor type	2020-21	2021-22	2022-23
IML	583.23	660.16	698.46
Average per month	48.60	55.01	58.21
Beer	237.82	268.83	390.66
Average per month	19.82	22.40	32.5

For the excise year 2022-23, the renewed licenses were 32 distilleries, 12 breweries; 23 wineries; and 68 microbreweries. The number of trade licenses (12 categories) has gone up from 11,457 in 2021-22 to 12,454 in 2022-23.

In an earlier article, Ambrosia had raised this issue as to how the government would fund these guarantees. One is through increased borrowings and two through hike in excise duty and other taxable methods. Immediately, after coming to power the Congress government increased electricity tariff by ₹2.89 per unit and several industries are up in arms, stating that it will render many units economically unviable due to high cost of production. Then came the hike on IMFL and beer. The Chief Minister who holds the finance portfolio had levied 20% on all 18 slabs of excise.

However, draught beer has remained untouched which is currently at 150% of declared price. For microbrewery it remains unchanged at 50% of the annual installed capacity at the rate of ₹25 per bulk litre. The Chief Minister had then said “Even after the increase in excise rates, the price of liquor in our state would be lower when compared to the neighbouring states.”

Karnataka among highly taxed, industry

However, the liquor industry states that Karnataka is among the highest in excise duty rates. The Confederation of Indian Alcoholic Beverage Companies (CIABC) in a statement had then said the hike in the additional excise duty (AED) may not increase the revenue for the state exchequer. “Consumer prices in Karnataka are already very high. I think further increase, that too to that extent, is going to hit sales in a big way,” said CIABC Director General Vinod Giri.

CIABC said that there is enough empirical data to show that the liquor demand turns quite elastic after 8-10% increase in price. “We may also see consumers downgrade to cheaper products. Considering that we fear that this tax increase may actually not lead to more tax collection as expected by the government, but will turn out to be counterproductive as many such increases in the past in other states have been. If that happens then all major stakeholders, i.e, the Government, the industry and the consumer will come out poorer.”

Similarly, the CEO of International Spirits and Wines Association of India (ISWAI) Nita Kapoor had urged the state to rationalise AED, reduce the MRP of premium brands in line with its neighbouring states. But the government has its own plans, considering that it has to keep its election promises. The government cannot falter at this moment as the Lok Sabha elections are round the corner and it can’t be seen faulting on its promises. The axe has to fall on alcobev sector which continues to be an easy target.

– R. Chandrakanth