Plugging leaks

THE SETTING up of the Karnataka Beverages Corporation three months ago and what appears to be an end to the policy of high taxation on liquor are the most significant changes in the excise policy of the Karnataka Government. The State Government is also taking steps to check tax evasion by the liquor industry, and the sale of "seconds".

For decades, the State's powerful liquor lobby has been a major financier of political parties. A good number of leaders of the industry have themselves entered politics and become Ministers. Even the S.M. Krishna Government has at least two easily identifiable nominees of the industry. Compounding the problem is the heavy arrears owed by the excise contractors to the Government. Some of the dues date back to 1943 in the case of the Old Mysore region. As the bids had been accepted in benami names, the Government has been unable to recover the arrears.

The Public Accounts Committee of the State Legislature has recommended more than once that parity should be established between excise duty and export duty on IML (Indian-made liquor) to check the menace of "seconds". But successive Governments did not heed the recommendations. In the name of exports and paying export duty, which used to be lower than the excise duty, the distilleries have been pushing the liquor into the local market. Till now, the wholesale trade in IML was being handled by the liquor division of the State-owned Mysore Sales International Ltd., a marketing unit of the Government. Unlike the MSIL, the Karnataka Beverages Corporation is devoted entirely to wholesale trade in liquor. It is being headed by a senior IAS officer.

It was the Karnataka Tax Reforms Commission headed by the former Chief Minister, Veerappa Moily, which emphasised the need for reforms in excise taxation. While presenting the interim report of the Commission two years ago, Mr. Moily said there was large-scale tax evasion by the industry. The Commission had noted that the share of excise in the tax revenue (State's own tax revenues) of 14 major States in the country ranged from 12 per cent to 16 per cent. In Karnataka, it had actually declined from 16 per cent to 14.5 per cent in the period 1993 to 1999. The growth in revenue declined sharply to less than three per cent between 1995 and 1998. Mr. Moily further said "for the policymaker, therefore, the objective would be to combine a moderately high tax rate with effective enforcement practices that could rapidly detect and plug revenue leakages to ensure that availability of non-duty paid liquor is controlled in the interests of the health and well-being of low income families".

It was widely believed that there was substantial excise duty evasion for both arrack and IML. It was generally accepted that the amount of excise duty realised on country liquor was not a good guide to actual consumption. On arrack, Mr. Moily had also noted that though from 1993 the Government had restricted the manufacture of arrack to the two State-owned or controlled undertakings, MSIL and Mysore Sugar Company (Mandya), manipulation continued through illicit distillation and distribution of country liquor by the bidders themselves.

The Commission had noted that tax evasion in the case of IML followed a different pattern. Proliferation of non-duty paid IML in the form of "seconds" was the most widely used mechanism for evasion. Physical checking by staff at distilleries had been neutralised by the usual methods, export permits misused and reused, and sales under-reported. There was also large-scale, inter-State movements to take advantage of marketing and pricing opportunities.

The Commission's estimates of tax evasion on IML are startling — the average of estimates of evasion for 1998-99 and 1999-2000 comes to Rs.390 crores, which was three times the average excise duty from IML for those years. In addition, sales tax evasion amounted to Rs.638 crores, the total coming to Rs.1,028 crores. Mr. Krishna's budget for the current financial year put an end to the policy of high taxation of liquor that had proved to be regressive. Among others, it increased the export duty on IML from Rs.2.50 to Rs.3.50 a bulk litre and on beer from 50 paise to one rupee a bulk litre. The fee levied on wholesale licences issued to shops was reduced. So was the licence fee in respect of clubs located in town municipalities and town panchayats. It was also announced that only warehouses established by the Government would supply rectified spirit and denatured spirit to industrial and pharmaceutical concerns. To strengthen enforcement measures, independent third party inspection in critical areas of management of distilleries, breweries and excise warehouses, was envisaged. For the current year the revenue from excise has been put at Rs.2,303 crores or 18 per cent of the State's own tax revenues.

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