Don’t Celebrate Duty Cuts Yet, States May Hike Liquor Excise

It also dangled the enticing prospect of lower prices of Scotch and imported liquor. But even before the celebrations have begun, India’s states are eyeing changing their excise policies and bringing in duty hikes that will offset part of the price cuts for tipplers.

India’s trade pacts are not limited to the UK or products sourced from there, they are likely to be extended to the European Union and the US. Similarly, excise duty hikes being finalised by states will also be geography-agnostic. With hikes in excise duty ranging from 15-20 per cent, the promise of lower liquor-vend prices will be challenged. 

“States don’t have an option. They need revenues to survive, and liquor is a low-hanging fruit. Hiking the price of a product on one front, just as it is being slashed on another, will trigger little resistance from buyers,” a senior revenue department officer from Uttar Pradesh said. “UP is targeting excise collections of Rs 63,000 crore in FY 2025-26 — up by nearly 20 per cent — and this hike will help,” he added.

Liquor Sales Collections Can Make Or Break States

The excise mop-up by cash-starved states—primarily from liquor sales—is critical to their survival. Alcohol sales account for Re 1 in every Rs 7 earned. If this revenue were to be sacrificed, most states would need to borrow more to meet a lion’s share of their social service expenditures and even more to meet their pension bill payouts.

UP, for one, will get Rs 2,55,172.21 crore as its share of central revenues, as per Budget 2025-26 estimates. Add Rs 63,000 crore being targeted by the UP government from excise collections this year, and the number crosses Rs 3,00,000 crore, the highest in the land. The next-best state by the excise yardstick, Bihar, stands to mop up revenues of Rs 1,43,069.43 crore despite the land of Gautama Buddha being a ‘dry’ state.

An analysis reveals that Karnataka, UP, Punjab, and West Bengal rely the most on excise collections, with alcohol sales making up for over 20 per cent of overall revenues. Leaving aside the dry states, among the top 20 large states and Union Territories, 12 have a higher share of earnings from liquor sales than the national average (Re 1 out of every Rs 7). It is closer to Re 1 out of every Rs 5.

The Top 5 make for interesting reading. Karnataka leads with 22.9 per cent of revenues from liquor sales, followed by UP (22.3 per cent), Punjab (21.2 per cent), West Bengal (20.8 per cent) and NCT Delhi (19.9 per cent). The average revenue collection of India’s states from liquor sales is 14.1 per cent.

There’s a moral battle at play, too. “We are robbing Peter to pay Paul,” warns Vijay Raghavan of the Tata Institute of Social Sciences. “It’s absurd to build your fiscal model around a substance known to destroy lives. Where is the moral compass?”

Top 5 States Lead In Move To Hike Excise Duties

Unsurprisingly, it is the Top 5 liquor revenue states leading the charge to hike excise. Excise on liquor is not just a tool, it’s a lifeline for state finances. In several states, it is the single-largest source of revenues. "It is a paradox that as a nation inks deals (like the UK FTA) to make products and liquor more affordable, its states may undo part of the work by not allowing retail prices to fall as much as the central taxes are cut," said commerce ministry officials.

“Liquor is a dependable tax base for states, immune to economic cycles. Unlike corporate income or property tax, alcohol sales rarely drop, even during downturns. That’s why it is targeted in times of fiscal stress. And India’s states are in stress right now,” said Sandeep Ghosh of EY India.

The stress is massive indeed. Total liabilities of states and UTs touched Rs 94.4 lakh crore in March-end 2025, 32.7 per cent of the estimated GSDP. Worse, the Lok Sabha has been informed that states have signed up for further borrowings in the coming years, with a projected increase to Rs 103.6 lakh crore in FY 2025-26. A contributing factor to the high liabilities is non-payment of GST dues to the states.

Rajiv Kaul, Executive Director of the Indian Alcoholic Beverages Forum (IABF), says: “Any hope of passing customs duty cuts completely to the end-consumer has evaporated. States will simply raise excise margins to neutralise part of the drop.”

Admittedly, states have been under fiscal pressure post-COVID, mainly due to growing welfare obligations like free electricity, health insurance, and farm subsidies. “Balancing populist demands with revenue is the reason why states are revisiting liquor excise rates,” says Anjali Verma, Associate Professor at IIM Bangalore. “It is politically safer to tax drinkers than to cut welfare schemes.”

States Have Leeway, Are Making The Most Of It

In India, liquor taxation is a state subject and outside the purview of the Goods and Services Tax (GST). This gives the states the leeway to determine prices, structures, and margins. Some impose compound levies, others use a slab-wise model based on alcohol content or brand category. The underlying logic is common, though — maximise collections without dampening demand.

Alcohol taxation is approached differently by other nations. For instance, France taxes wines and spirits under a unit-based excise model, with revenues making up only 1 per cent of national income. In Japan, excise on alcohol contributes a modest 1.6 per cent of the budget. In the UK, where whisky is a way of life, duties are high but not critical to government collections and spending.

“In India, the situation is flipped,” says Ritika Bhargava, Director of NIPFP. “We rely on alcohol like a crutch. It’s not just a revenue tool, but a fiscal oxygen pipe.”

A revenue reality is that India’s tax-to-GDP ratio is under 12 per cent, while in most OECD nations, it is above 20 per cent. With limited powers to tax income or services directly, India’s states milk all the ‘sin goods’ — fuel, tobacco, and liquor — to earn revenue.

Policy Friction Spoils High Of Final Shot

India’s abrasive Centre-state relationship also plays a part in determining fiscal decisions. States often make moves that are contrary to the resolve and intent of national agreements. In this case, while the left hand makes Scotch cheaper, the right hand is slapping a higher tax, making for a classic Indian cocktail — a ‘Patiala Peg’ — strong, complex, and quite sobering.

Each path carries its contradictions. Each path has challenges and limitations. In a nation where politics is getting tied to post-poll schemes and promises, each path calls for a choice — ‘yes’ or ‘no’ to liquor sales revenues?

This is the second part of a two-part story. The earlier part can be accessed at: With UK Whisky, Gin Getting Cheaper, Desi Alcobev Cos Worried

(The writer is a veteran journalist and communications specialist. Views are personal)