Lessons from Delhi’s failed corona cess on liquor: Don’t overtax citizens

With sales plummeting, Delhi government has revoked the 70% corona cess it had imposed on liquor. Instead it has opted for a moderate 5% increase in VAT. The imperative of quickly raising revenues during the lockdown had impelled Delhi to take this path but within a few days of lifting curbs on liquor purchases, sales also crashed.

According to the Confederation of Indian Alcoholic Beverage Companies, sales in Delhi had dropped by 58% in May compared with the same period last year while neighbouring Haryana and UP seemed to be bouncing back due to lower additional taxes of 10-15%. In other words, Delhi’s loss was its neighbours’ gain as tipplers crossed borders and black marketeers also got into the act. There would also be a significant section turned off by the inordinately high prices.

The same phenomenon is also being witnessed Andhra Pradesh which imposed a 75% cess driving both legitimate and illegitimate business to neighbouring Telangana. The temptation to raise taxes across sectors will grow as governments struggle for revenues and greater fiscal space. The bottom line is that a rational nexus between consumption expenditure and tax rates must be arrived at so that both remain on an upward trajectory.

Read also – Delhi: Corona cess on liquor out, but VAT up to 25%

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