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NEW DELHI :
State governments across India are desperately seeking to increase revenue and have implemented a number of measures, including increasing fuel taxes and increasing liquor, while trying to make up for the drastic shortage of revenue due to the coronavirus blockade.
With declining transfers of funds from the Center and limited avenues to raise taxes after the goods and services tax (GST) was introduced in 2017, states have relied heavily on borrowing money from markets to combat the health crisis of covid-19.
Now that they have reached the debt limit, one of the few options left to the states is to increase taxes on fuels, liquors and tobacco that are still outside the GST regime.
States’ own tax collections are expected to receive a 40% impact in April, and with the Center’s GST revenues also collapsed, states will get a lower share in a double whammy for them. Punjab Finance Minister Manpreet Singh Badal warned last Monday that the combined fiscal deficit of the central and state governments this financial year could touch 10% of gross domestic product (GDP).
The Center has already taken the first steps to reopen the economy. Economic activities have now been allowed with due caution in greedy-free areas to bring to life the battered economy that will contract for the first time in four decades. This has helped restart the sale of transportation fuels, liquor, and tobacco in so-called non-containment zones, opening a vital source of tax revenue for states.
Gasoline and diesel prices have increased in 14 states, including Delhi, Rajasthan and Karnataka, since March 22, even as world oil prices plummeted. Brent crude is trading near a 21-year low, and US oil futures traded in negative territory last month. “There has been a downward trend in the prices of petroleum products since the second half of January. Consequently, during January-March, state oil trading companies reduced the prices of gasoline and diesel by more than ₹10 per liter, including the impact of the increase in the excise tax on ₹3 per liter as of March 14, but that was not passed on in retail prices, “said a senior executive at a fuel retailer who requested anonymity.
The Delhi government, led by the Aam Aadmi party, announced a 70% excise tax on liquor on Monday night. Neighboring Haryana, governed by the Bharatiya Janata Party, also plans to raise a special cessation. The measures come when the first day of the liquor stores opening saw an avalanche of buyers who mocked the rules of social distancing across the country, risking the spread of the virus.
The Andhra Pradesh government also raised alcohol prices by 50%, one day after the retail liquor stores opened.
“The new levies introduced by the states are essentially steps to offset the losses they have incurred and also to curb the crowds at alcohol stores,” said Saloni Roy, senior director of Deloitte India in a statement.
There have been cases in the past where states have resorted to such a practice to combat a crisis. In 2018, Kerala raised the excise tax on liquor to fund humanitarian work after the state faced the worst floods in about a century.
The liquor industry contributes about ₹2.5 trillion a year to states through excise and other taxes, according to an industry executive. Most of this goes to state governments since liquor is a state issue.
Karnataka increased the excise tax on liquor by 6% in its budget filed on March 5 to help mitigate a ₹Reduction of Rs 20 billion from the state’s share in GST, central taxes and the group divisible under the calculations of the 15th Finance Commission. The state is also trying to tap other sources of revenue.
“The government is in serious trouble and one of the consequences is income and finances. There must be a structural perspective on how the government spends money, “said Krishna Byre Gowda, a former Byatrayanapura minister and congressional legislator.
ANI reports that the Madhya Pradesh business tax department has issued orders to open liquor stores by 7 a.m. at 7 p.m., except those in red zones.
The utility of assets has been a key criterion that guides the indirect fiscal policies of governments. Therefore, polluting fossil fuels like gasoline have attracted high taxes.
Yunus Y. Lasania in Hyderabad; Sharan Poovanna in Bangalore; and Pretika Khanna and Gireesh Chandra Prasad in Delhi contributed to the story.
