Tipsy on tipple tax

Anup Menon

THE BREWERIES and distilleries industry is subject to a high level of taxation.

The high price paid by the end-user is attributable to the high level of duties. For instance, Kerala recently modified its tax structure on hard liquor. The sales tax on hard liquor is around 85 per cent in the State, in addition to an excise duty of around 100 per cent. This pushes up the cost of a product by around 185 per cent. Apart from this, Maharashtra has brought hard liquor under the MRP system. Overall, the industry contributed close to Rs 25,000 crore to the exchequer.

The risks associated with the industry are greater as political stability is becoming uncertain. With Prohibition so easily imposed, the industry frequently finds itself in trouble. In the past, Andhra Pradesh and Gujarat imposed bans on liquor. When a market as big as Andhra Pradesh (the ban was later withdrawn) is hit by such a ban, the impact on manufacturers is significant.

The Government also controls capacities. The industry is not allowed to increase capacities without the Centre's approval. It is also among the few industries under the licensing policy. Liquor companies also have to seek permission from the State governments before expanding.

Competition

Increasingly intense competition in the beer industry could be important for the future. Though the Australian brand, Fosters, has set up shop in India, its products are sold only in Maharashtra and Goa. Within two years of commencing operations, Fosters managed to grab 33 per cent of the mild beer market. With the provisions of the World Trade Organisation (WTO) soon to take effect, more foreign competition is imminent.

The IMFL market is also likely to be affected by the WTO provisions. There is now an import tariff of 233 per cent on imported liquor. Further, it can be sold only in duty-free shops. From April 2001, import tariffs have to be lowered to around 150 per cent and subsequently to 75 per cent. It also provides for imported liquor being sold through any outlet in the country. Given these factors, foreign companies such as South African Breweries may be more than willing to set up units here. If that happens, and some of the well-known international brands become available at a lower cost, domestic companies may tough competition on hand.

Prospects

The industry's future appears bright provided exogenous factors are brought under control. The very fact that most manufacturers have been operating under extreme constraints is also indicative of its vast potential. It is only a matter of time before things matters are sorted out.

From the regulatory angle, the policy towards liquor and associated products needs to be changed. The industry has been calling for the removal of beer from the IMFL category to reduce costs.

Though there are a large number of players, many of them are single-market companies. With the entry of foreign players, the smaller players may not find it viable to operate. Hence, there may be a shakeout in the industry with the larger players acquiring control over the smaller ones.