COVID IMPACT ON ALCO-BEVERAGE INDUSTRY

[Dr. Sanjiv Agarwal]

India opened up its lockdown 3.0 on 4^th May and 4^th one on 31^st May, 2020 and it is  now called lockdown 5.0 or unlock 1.0. The sale of liquor was also restored w.e.f. 4^th May, 2020.

To offset the increased financial burden in all states, almost all states resorted to steep rise in taxes making it exceptionally high tax or cess in May, 2020 on alcoholic products. The sales volume witnessed a steep fall from 40 to 80% in many states or the consumers reacted sharply to such steep hike in prices due to special taxes on sale of liquor, its demand being considered highly price inelastic. The people who would like to consume liquor would do so, come what may. This time to encash the mad rush and long queue outside retail outlets across the country, governments thought that let’s encash the opportunity as a blessing in disguise.

Since liquor consumption is discretionary, it is likely to take a hit even otherwise as disposable incomes in the hands of consumers has also shrinked substantially, besides there being job losses. This further lead to missed revenue opportunity for states and distress among consumers. The other major takers of liquor are hotels and restaurants which are also closed since March 25 adding to pain of both, alco-beverages and hotel industries.

States increased the taxes as high as upto 75% of the MRP, though in all likeliness, it may be rolled back in near future. Delhi imposed a corona cess @ 70% on MRP of beverages. West Bengal increased that by 30% followed by Uttar Pradesh, Andhra Pradesh, Telangana, Rajasthan, Haryana and so on.

It is estimated that there are over 70000 liquor retail outlets across the country, which were on board from 4^th May except in red zone / containment zone. We had 130 districts in red zone in May beginning.

The first quarter is  an important quarter which contributes majorly to annual sales. In case of beer, it is almost 45% of the annual sale. Since nation was under lockdown, first quarter sales are likely to be dismal on one hand and on the other hand, expenses touching the roof. Summers are the best months for sale of beer and other products. India is also world’s top whiskey market.

Covid-19 has adversely impacted the liquor industry on two counts – one, sales went down substantially and two, post lockdown, states have increased the taxes or cess by 30 to 80 percent making it costlier for consumers. The demand has therefore fallen substantially.

What could be the alternative business plans ? Most of the distilleries are confronted with what to do with their spare production capacities ! If the liquor production suffers, the opportunity is to produce and sell sanitizers and other related products like ethanol to industry. With Covid -2019, sanitizers are in huge demand and short supply.

Many alco-beverages comprise have capitalized on the present opportunity to bridge the gap between demand and supply of sanitizers which happens to be in acute short supply and alcohol is the basic ingredient in the sanitizer being recommended and used to combat Covid-2019 virus.

This opportunity comes as a blessing in disguise for alco-beverages. Many companies have supplied ethanol to other companies for their industrial use. There comes another opportunity from Covid in the form of eligibility to claim input tax credit (ITC) against GST paid on inputs and input services used in manufacturing of sanitizers. Hitherto, all alco-beverages were out of GST net and as such entire ITC was going waste and adding to the cost. This continues presently also but since there is slow down in industry, production has also fallen.

The sanitizer attracts 18 percent of GST and is not an exempt supply under goods and service tax law. The product [hand sanitizer (alcohol based)] has ingredients such as Ethyl Alcohol LP, Glycerol LP, Hydrogen Peroxide LP., Purified water etc. The active ingredient of Ethyl Alcohol LP. is over 70%in most of the cases. Hand sanitizers having ethyl alcohol as ingredient is a alcohol based product. Hand sanitizers (alcohol based) is liable to be classified under tariff heading 3808 of HSN attracting 18% GST. Manufacturer’s of hand sanitizers (alcohol based) classifying it under tariff heading 3004 of HSN with 12% GST are wrongly classifying the said product. This misclassification appears to have resulted in substantial tax evasion. Directorate General of GST Intelligence has initiated investigation in the matter.

Covid 2019 has thus changed the playing field for people engaged in this business (see table )

Particulars	Pre-Covid	Post-Covid
Alco-beverages	Sales	Sales
GST on Alco-beverages	Nil	Nil
GST on Sanitizers	-	Taxed @ 18%
ITC on input costs	Not allowed	Allowed
Sale of Liquor	High	Low
Sale of sanitizers	-	Huge
Cost due to ITC	No change	Low
Margin on Sanitizers	-	High

Since Covid-2019 is here to stay for a reasonable time, it can be safely thought of changing the product mix from only liquor for human consumption to a mix of sanitizers and alco-beverages as the former is likely to sell more now, being an item of mass consumption.