Commentary 1

Title of the article: Karnataka duty on liquor up by 17-25%

Source of the article: Times of India
https://timesofindia.indiatimes.com/city/bengaluru/excise-duty-on-liquor-up-by-
17-25-karnataka-to-earn-rs-3000-crore/articleshow/75589743.cms
Date the article was published: May 7, 2020
Date the commentary was written: March 28, 2021
Word count of commentary: 799
Unit of the syllabus: Microeconomics
Key concept: Intervention

Excise duty on liquor up by 17-25%, Karnataka to earn Rs

3,000 crore
BENGALURU: The Karnataka government on Wednesday announced an
increase in additional excise duty (AED) on Indian-made liquor (IML) in the
range of 17%-25% across all slabs, seeking to rake in nearly Rs 3,000 in
additional revenue in the current financial year.

The hike is in addition to 6% AED that kicked in on Tuesday. With the

combined revisions, the effective excise duty hike now stands between 23%
and 31%. The revised prices will come into force on Thursday as per a
government notification issued on Wednesday.

In absolute terms, the hike is between Rs 5 and Rs 179 per quarter (180ml)
bottle on the maximum retail price (MRP) across bands.

The excise department has collapsed 18 IML slabs (going by the MRP in
ascending order) into three categories: The hike in additional excise duty will
be 17% for slabs one to four; 21% for slabs 5 to 10; and 25% for slabs 11 to
18. For instance, a liquor bottle with an MRP of Rs 1,000 will cost Rs 1,230 in
the first slab, Rs 1,270 in the second slab, and Rs 1,310 in the third slab.

With revenue collection taking a hit due to the Covid19 lockdown, the
government, with excise duty hike, hopes to net Rs 2,500 crore to Rs 3,000
crore more in the current fiscal. The revenue target from liquor sales for this
current fiscal is Rs 22,700 crore as per the budget.
Student Response:
This article states that the excise duty on taxes in the state of Karnataka in
India on Indian-made liquor are up by 17-25%. Because of this, the state is
expected to earn a revenue of 3,000 crores.

Indirect taxes are put on spending to buy goods and services. They are paid
partly by consumers but to the government through firms, hence indirect.
Excise duty is an indirect tax imposed on particular goods and services such
as petrol, cigarettes, and in this case alcohol. Excise taxes can be further
divided into specific taxes and ad valorem taxes. Ad valorem taxes are such
that as the price of a good increases, the tax increases. Specific tax is a fixed
amount of tax per unit. The tax in the article is a specific tax because the hike
is between 5 to 179 rupees per 180ml (per quarter bottle). It is stated that the
tax was added on an already implemented 6% excise duty. Consider the
diagram below:

As seen, when the tax is imposed on alcohol, the supply curve shifts upward
by the amount of tax applied. This is a parallel shift because the amount is
fixed per unit. It is a leftward shift of the supply curve which says that for each
price, the firm is less willing to supply output. The demand curve remains
constant because the demand for alcohol will not be affected, hence the
increase in revenue. The new market equilibrium is determined so the price
paid by consumers for alcohol is now increased to Pc and the quantity falls to
Qt.

The reasons for this tax implementation are not stated, however, there could
be various motives. These indirect taxes are sources of government revenue,
providing profits. They are also a method to discourage the consumption of
certain goods harmful to an individual which can be seen in the current
scenario for the demerit good (good whose consumption is considered
unhealthy or otherwise socially undesirable due to perceived negative effects
on the consumers themselves) such as alcohol in the current situation.
Indirect taxes are also used to distribute income, however, it is not done in this
scenario. Lastly, they improve the allocation of resources by correcting
negative externalities which will be later elaborated on.

The market undergoes changes following the implementation of indirect taxes.

The equilibrium quantity produced and consumed falls from Q* to Q meaning
that there is no longer an equilibrium in the market. The equilibrium price
increases from P* to Pp which is price paid by the consumers, making the
alcohol more expensive. Consumer expenditure on the good is given by the
price of the good times the quantity bought (from the equilibrium P* x Q* to Pc
x Qt.) The price received by the firm falls as does the firm’s revenue. The
government receives tax revenue from consumers. And finally, there is an
under allocation of resources to the production of the good.

Indirect taxes are considered market-based policies. It is a key policy to

correct negative consumption externalities, external negative costs created by
consumers. Indirect or Pigouvian taxes are imposed on goods such as alcohol
or cigarettes. The result of this is a decrease in supply and an upward shift of
the supply curve from MPC (marginal private costs, costs to producers of
producing one more unit of a good) to MPC plus the tax.

Indirect taxes have various consequences. Consumers are affected negatively

because of the increase in the price of the good as well as the decrease in the
quantity they buy which means they pay more for less output. Producers or
firms are also affected negatively. They receive lower prices and there is a fall
in the quantity of output sold which results in a fall in revenue. The
government is one of the only stakeholders that gains because their revenue
increases which is positive for government budgets. The workers are worse off
because a lower amount of output is needed therefore fewer workers are
needed to produce it. This tax may lead to some unemployment.
With the imposition of indirect tax, there is an under allocation of resources to
the production of the good. The result is also reduced consumer and producer
surplus which part of which becomes government revenue and welfare loss.
This welfare loss occurs because of the under-allocation of resources leading
to underproduction. Too little of the good is produced and consumers relative
to the social optimum making society worse off as a result of the tax.

The imposition of this tax can have various impacts on consumers. Everyone
is required to contribute, they are nominal and convenient, cannot be evaded,
and are spread over a wide range. However, they can be regressive and raise
prices unduly and no actual civic consciousness is gained.