Driving Responsible Drinking Through Equivalence Taxation Approach

India stands at crossroads, with an opportunity to reform its beer and alcohol taxation policies to align with global best practices and WHO recommendations.

Introduction

Alcohol consumption has been an integral part of human civilisation and has been intricately woven into the very fabric of societies worldwide throughout history. Consumption and use of alcohol spans across societies and epochs, with indications to suggest that beer and wine were produced and consumed more than seven to eight thousand years ago,¹ marking milestones, facilitating social bonds, and in certain contexts even acting as a medicinal remedy.² Moreover, it holds significance in several religions, often used in rituals and ceremonies. In India, ancient Vedic texts extensively celebrate the use of soma (alcohol) for worship, pleasure, spiritual upliftment, aesthetic enjoyment, and even health benefits, with alcohol being described as an ingredient used in certain medical concoctions in traditional Ayurvedic medicine.³ Also, the Arthashastra, a Mauryan period treatise, outlines regulations for alcohol production and sale, indicating societal acceptance.⁴

Given this rich tapestry of alcohol in human culture,⁵ highlighting its significance beyond mere consumption, there arises a need for a balanced understanding of its benefits and drawbacks, promoting informed choices and moderation. While the choice to consume alcohol remains a personal one, reflecting individual freedom and cultural diversity, it is imperative to acknowledge the consequences that can arise from its excessive consumption or misuse. In the light of these concerns, governments across the world and international organisations have suggested regulatory measures, with taxation being the foremost approach, to efficaciously manage the consumption of alcohol and mitigate its adverse effects.⁶

There is, therefore, a need for a balanced discussion on alcohol, focussing not on prohibition but on promoting moderation, informed choices, and supportive policies through an appropriate taxation framework.

Governments across the world predominantly levy taxes on alcoholic beverages to generate revenue.⁷ While alcohol tax as a tool to disincentivise the irresponsible consumption of alcohol and improve public health by promoting responsible consumption remains largely underutilised or mis-utilised,⁸ governments and organisations worldwide are increasingly starting to recognise its importance and cost-effectiveness.⁹

The World Health Organisation (“WHO”), in its technical manual on alcohol tax policy and administration, describes alcohol tax as a ‘win-win’ strategy, often leading to an increase in revenue while also regulating alcohol consumption and its associated harms to public health.¹⁰ This is also recognised as one of the most effective interventions by WHO’s global strategy to reduce the harmful use of alcohol, approved by member states in 2010 (“WHO Global Strategy 2010”).¹¹ In May 2022, the 75th World Health Assembly adopted the Global Alcohol Action Plan to effectively implement the WHO Global Strategy 2010, which calls for countries to employ taxation as a means to address the affordability of alcohol and consider earmarking alcohol tax revenues towards reducing its harmful use.¹²

Global best practices in the taxation of alcohol

With multiple types of taxation structures around the globe, various countries have employed diverse tax structures – specific excise taxes, ad valorem taxes, or hybrids thereof, often complemented by value-added taxes (“VAT”) and sales taxes – with an aim to manage consumption and maximise revenue.¹³

Excise taxes are generally applied either as, (i) a percentage of the price of a beverage (ad valorem), (ii) a fixed amount applied on the volume of beverage without accounting for the alcohol content therein (volume-based specific), or (iii) a percentage of the alcohol content in a beverage (alcohol content-based specific). Some countries use a combination of these types of excise taxes.¹⁴

The WHO Global Strategy 2010 highlights taxation and pricing policies as effective measures to control and regulate the harmful use of alcohol. More particularly, the WHO suggests that tax rates should ideally be applied basis the alcohol content in beverages. This approach targets reducing alcohol intake by volume.¹⁵ Through this, high-alcohol beverages become expensive, incentivising consumers to consume low-alcoholic beverages. This is supported by studies indicating that moving towards alcohol content-based taxation could be an effective tool to control alcohol by volume (“ABV”) intake.¹⁶ This could, in fact, also create a fairer market by charging the consumer per milli-litre of alcohol while simultaneously promoting responsible alcohol consumption, thereby aligning with public health goals.¹⁷

When it comes to estimates of the efficacy and cost-effectiveness of alcohol policies, the relevance of the The Sheffield Alcohol Policy Model ("Sheffield Model") cannot be ignored. The Sheffield Model has been influential in providing a basis to public and political debate on alcohol policy and in providing an empirical basis for informing policy decisions concerning minimum unit pricing of alcohol.¹⁸ It uses demographic and consumption data along with epidemiological evidence to simulate the effects of changes in alcohol pricing and availability. SAPM helps policymakers understand the potential benefits and consequences of alcohol regulations across different groups, informing debates and shaping policies to mitigate alcohol-related harms. A study conducted in England based on the Sheffield Model in 2014-15 found that alcohol content-based taxation and minimum unit pricing were more effective when compared to imposing an ad valorem tax or increasing the current tax in terms of reducing alcohol-related health inequalities and reducing the mortality rate amongst heavy drinkers.¹⁹

The Indian Approach

Global trends of alcohol use vary widely by region, with a noticeable trend being consumption being proportionate to countries’ income levels.²⁰ However, recently, there has been a rise in alcohol availability and consumption in low-income and middle-income countries as well.²¹ This is evident in India, where consumption has been steadily rising.²² Additionally, the poorer sections of society are more likely to experience the negative effects of alcohol misuse for a given amount and pattern of alcohol use, and this is especially relevant in low and middle-income countries where a larger proportion of the population still lives in poverty.²³ In such a scenario, the focus should be on incentivising lower alcoholic content beverages so as to offer a less harmful alternative aimed towards reducing harmful usage of alcohol.

Taxation policy should be aimed at preventing market distortions or hazards related to the harmful consumption of liquor. Imposing disproportionate taxes by taxing beer and spirits based on beverage volume and not ABV can unfairly burden moderate consumers and those with limited financial resources, effectively disabling them from choosing in favour of low-alcoholic beverages. This is distinctly noticeable in India, considering that a significant portion of the Indian population falls within low to medium-income brackets.²⁴ It is crucial, therefore, to mitigate such unfair penalisation by devising an equitable taxation framework based on ABV.²⁵

India is a federal state. It follows a decentralised division of power wherein the Centre and the states rule upon matters in their respective domains as specified in the Constitution of India through inclusion in the union (central), state, and concurrent lists.²⁶ ‘Liquor’ forms a part of the state list under Entry 8 of Schedule VII,²⁷ thereby allowing each of the state governments to implement their own excise policies. While two types of taxes are generally applied to alcoholic beverages in India: excise duty and VAT, the range of alcohol policies varies substantially across Indian states and even within states over time, encompassing everything from flat fees to percentages based on the manufacturing cost, the retail price, or a price set by the government. Additionally, these taxes can be applied to different measures, such as ‘per bulk litre’ to ‘by proof level’.²⁸ Presently, there is an arbitrary imposition of excise duties and taxes across alcoholic beverages by most states, without any uniform formula for the imposition of taxes, with the demand for revenue by individual state governments acting as a driver for variation in alcohol regulation.²⁹ This revenue constitutes a major single source of a state government’s exchequer.³⁰ Though alcohol is exempted from GST, States have found a turnaround by imposing GST on transportation and freight charges of liquor. Owing to this, a consumer often ends up paying four or five times more than the price at a distillery.

The current taxation structure in India seems more favourable to hard liquor, so the cost per milli-litre of pure alcohol for spirits is much lower than that for beer or other products with lower ABV.³¹ This drives consumer preference for hard liquor in India and an associated increase in health issues emanating from alcohol abuse which necessitate a re-evaluation of existing regulatory measures to promote responsible drinking.³²

Since most states impose uniform duties on alcoholic beverages regardless of their ABV content, when these duties are calculated across different types of beverages like beer, hard liquor, and wine, it becomes apparent that beverages with lower alcohol content incur higher duties per milli-litre of alcohol. Consequently, the maximum retail price of a bottle of beer can match or surpass that of a 180 ml bottle of high-alcohol beverages like IMFL making the situation highly complex if one wishes to target reduction of pure alcohol consumption.³³ This pricing anomaly nudges consumers toward opting for high-alcohol beverages to achieve greater intoxication levels at a similar or lower cost, thereby potentially promoting the production of these beverages. This trend, combined with Indian consumers’ preference for high-alcohol beverages like IMFL and country liquor,³⁴ fosters irresponsible or excessive alcohol consumption. As per the WHO’s World Health Observatory, the annual average per capita consumption in the adult population (15 years of age and older) in India for 2019, in terms of litres of pure alcohol, was 2.85 litres for spirits compared to a meagre 0.23 litres for beer.³⁵ Therefore, a case for higher duty for higher ABV content finds relevance. This will ensure that heavy drinkers pay for costs relative to their consumption of ABV and consider a shift to low-alcoholic beverages.³⁶

Moreover, excessive taxation on alcoholic beverages may inadvertently steer consumers toward the market of illicit alcohol by virtue of it being a cheaper alternative.³⁷ In fact, the disparity in price between legal and illegal alcohol is one of the primary factors driving the illicit alcohol trade,³⁸ which poses significant health risks arising due to negligible quality checks in illegally manufactured alcohol which aims at evading duties in toto.³⁹

Consequently, establishing a taxation system that ensures fairness in alcohol pricing is imperative. This system should levy taxes based on the alcohol content, promoting an equitable approach to alcohol taxation. The adoption of alcohol volume-based taxation, a policy that has been implemented by various countries including Australia, Austria, Belgium, Canada, Denmark, Finland, United Kingdom, and South Africa to name a few,⁴⁰ might therefore prove to be a strategic approach to reducing the harmful use of alcohol in India.

Some states, such as Rajasthan, West Bengal, Uttar Pradesh, and Madhya Pradesh, have recognised the importance of lowering tax rates on beer in recent years to encourage responsible consumption. Additionally, the Maharashtra government has formed a committee to explore the possibility of reducing taxes on beer to boost sales and potentially increase revenue.⁴¹ Such a step could naturally lead to a decrease in per capita alcohol consumption in India.

By directly targeting the core factor contributing to alcohol-related harm – the amount of pure alcohol consumed – and making lower-alcohol products relatively cheaper, alcohol volume-based taxation can encourage consumers to opt for lower-strength alternatives or reduce overall consumption and promote moderate drinking, leading to a decrease in alcohol-related health issues. This would also lead to an increase in greater health equity among the poorer sections of society.⁴² Beyond the public health benefits, Alcohol content-based taxation could lead to economic savings by reducing the healthcare costs associated with treating alcohol- related conditions and by mitigating the social impacts of excessive alcohol consumption.⁴³ Furthermore, this taxation regime might even be a solution for addressing the illicit usage of alcohol by offering a less harmful alternative to consumers.

Further, such a shift in consumption patterns towards lower alcoholic strength alternatives would incentivise market players to create new products and reformulate beverages,⁴⁴ driving innovation in the industry towards high-quality and creative lower alcohol content beverages, such as beer.⁴⁵ This would lead to an improvement in quality and also lead to a consequent increase in competition in the industry, effectively benefiting the end users, i.e., the consumers.⁴⁶ The flexibility of alcohol volume-based taxation policies, which can be adjusted in response to changing consumption patterns and health outcomes, makes them attractive for India by enabling policymakers to fine-tune tax levels to maximise public health benefits. Further, since “public health” is a state subject under Schedule VII, Entry 6 of the State List,⁴⁷ the primary responsibility of providing healthcare services and maintaining public health also lies with the states. This revenue generated by states through the taxation of alcohol can be allocated towards public health initiatives and subsidising healthcare expenditures,⁴⁸ thus significantly aiding states in improving health outcomes.

Conclusion

India stands at crossroads, with an opportunity to reform its beer and alcohol taxation policies to align with global best practices and WHO recommendations. As elaborated above, by adopting a taxation model based on alcohol content, India can meet public health objectives and foster a responsible drinking culture. This approach requires a careful balance of public health goals, tax efficiency, and equity to access and penetrate the market for low-alcoholic beverage manufacturers. While the principle of taxing alcoholic beverages based on their alcohol content has merit and is supported by public health advocates, its effectiveness likely depends on several factors, including the elasticity of demand for alcoholic beverages, the availability of lower-alcohol alternatives, cultural and psychological attitudes towards drinking, enforcement of tax policies, and the overall framework of market freedom facilitated by a country. Implementing necessary changes, mindful of Article 47 and existing liquor laws, represents a complex but vital step towards a healthier, more responsible approach to alcohol consumption in India.

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