Ease of doing business in the alcobev sector: A key revenue lever for states

The fiscal health of states remains a cornerstone for achieving sustained and inclusive economic growth and is central to realising the vision of Viksit Bharat by 2047. Among states’ own tax revenues, excise duty emerges as the third-largest source, contributing nearly 17 per cent, after State GST and sales tax. This underscores the critical importance of efficient revenue mobilisation and optimisation at the state level. Persistent fiscal deficits compel states to rely on borrowings to finance expenditure. In FY25, states on average have budgeted borrowings amounting to 27.2 per cent of GSDP, reflecting continuing fiscal pressures.

In this context, assessing the gross fiscal deficit as a proportion of GSDP becomes particularly pertinent, as it highlights the structural challenges confronting state finances. Against this backdrop, optimising revenue from the alcohol and beverage (alcobev) sector, which includes IMFL (Indian Made Foreign Liquor) and beer, becomes indispensable for strengthening state finances and improving fiscal sustainability. India’s alcoholic beverages industry sits at the intersection of politics, public health and public finance, but rarely at the intersection of reform. State excise on liquor is the third-largest source of own-tax revenue for states, and in several of them, alcohol accounts for more than a fifth of total tax collections. Yet, ease of doing business in this sector is an afterthought, constrained by archaic depot infrastructure, opaque pricing and regulatory fragmentation that treats each state as a separate country.

Alcohol is constitutionally a state subject, granting states full control over licensing, taxation and distribution. For the industry, this translates into operating across multiple and fragmented regulatory regimes. Given the relatively inelastic nature of alcohol demand, many states have relied heavily on frequent excise duty hikes to shore up revenues. However, these increases are often not accompanied by revisions in ex-distillery prices or trade margins, compressing manufacturers’ share to around 16-20 per cent of the retail price, while states appropriate nearly 80 per cent. While fiscally expedient in the short term, this skewed structure undermines long-term investment. Most large states operate a State Beverages Corporation (SBC) that monopolises wholesale distribution, controlling depots, logistics and supplies to retail vends. In theory, this model improves tax control and reduces leakage; in practice, many SBC depots are decades old, with limited covered storage, rudimentary inventory management and very low truck-handling capacity. Day-long waiting times for unloading are common during peak seasons, locking up working capital in goods that are physically in the state but not available for sale.

Because unloading at the depot is a bigger bottleneck than loading at the distillery or bottling plant, unions and local associations often charge a premium for unloading services, denting margins. Where freight and handling charges are not transparently benchmarked or competitively tendered, these costs can easily exceed what a modern private warehouse would pay for faster, technology-enabled operations.

Basic ease-of-doing-business reform

Time-bound service standards at depots (maximum turnaround time per truck, with monitoring and penalties for breach).

Modernisation of depots with palletisation, dock levellers, handheld scanners and warehouse management systems. Competitive contracting of loading/unloading services through e-tenders, with clear ceilings on depot handling charges and prohibition of exclusive union monopolies.

Some states have experimented with limited private-sector participation in logistics, but there is no systematic benchmarking of depot performance or public reporting of turnaround times.

Despite the centrality of excise to state finances, very few states run regular, institutionalised price-revision committees that consider cost inflation, compliance costs and tax buoyancy in a transparent way. Instead, excise duties and fees are tweaked frequently, often at the time of the state budget, while ex-distillery prices and trade margins are kept frozen for long stretches, eroding profitability. This asymmetry encourages short-term behaviour: companies aggressively chase volume in high-tax states without commensurate investment in responsible retailing or brand building, while states focus on headline revenue rather than long-term elasticity, illicit trade or tourism potential.

MRP changes, labels and extra neutral alcohol

Ease of doing business in alcobev is not only about tax rates; it is also about the micro-frictions that accumulate along the way. Frequent changes to label requirements, sticker formats or cap engravings, without adequate transition windows, can render existing inventory unsaleable overnight. This is particularly damaging in a supply chain where product moves from distillery to depot to retail over weeks, and where the manufacturer’s margin is already thin.

States may adopt a minimum implementation window for packaging or MRP-related changes - say three months — combined with digital approvals so that old and new stock can coexist during a defined phase-out period.

A few progressive states have started digitised excise portals for label approvals, production permissions and duty payments, significantly cutting down manual file movement. Scaling such systems across the board, with standard APIs for integration with company ERPs, would reduce disputes and speed up reconciliation.

There is a need for new AI-based technology to streamline this end-to-end supply chain, rather than relying on age-old ERP systems which primarily focus on inventory management.

ENA policy is another neglected area. Recent clarifications that ENA used for beverage alcohol is outside GST from November 2024 simplify the tax structure but also highlight the need for clear state-level rules on ENA reusability and disposal. Where finished goods or ENA become unsaleable due to regulatory or market reasons, states should spell out protocols for denaturing, industrial diversion or safe destruction, rather than leaving companies in a grey zone that invites litigation or informal settlements.

Cleaning up belt outlets

Retail design in many states has evolved unevenly, resulting in dense “belt” clusters of liquor outlets and large underserved areas. This distortion encourages informal coordination between eateries and select vends, diversion of stock, and the proliferation of local belt brands and illicit liquor - posing serious public health risks, fuelling corruption and leading to avoidable fatalities.

Technology and AI can address these challenges through blockchain traceability, IoT logistics monitoring, anomaly detection and digital excise stamps, enabling real-time supply chain visibility and curbing ENA diversion, counterfeit liquor and illegal retail outlets.

AI-powered predictive analytics and automated compliance audits can further shift excise enforcement from reactive policing to proactive, risk-based regulation, improving transparency, public safety and revenue integrity.

Equally important is a regulatory approach that respects transition windows for MRPs and labels, clearly defines ENA usage and disposal norms, and uses data to rationalise retail outlet placement.

Evidence from reform-oriented states shows that simplifying procedures and improving governance can enhance efficiency without compromising revenue. With demand largely inelastic and the state already the primary beneficiary of alcohol sales, the focus must shift from extracting higher taxes to restoring efficiency, transparency and accountability in the system.

Krishna V Giri is a Distinguished Fellow and Special Advisor to the Chairperson, and Abhishek Jha is a Fellow. Both are at the Pahle India Foundation; views are personal