Demystifying Delhi Government’s Excise Policy — Corruption or Disruption?
Truth has three sides — Your Side, My Side, and The Truth. The objective of this story is to get closer to “The Truth” as much as possible. For this, I studied the liquor policy, checked how the various events unfolded, and went through the available facts to uncover the truth.
Excise Policy Summary
The new Delhi Excise Policy 2021–22 was implemented on 17 Nov 2021 with the objectives of improving state excise revenue, eliminating Mafia from the liquor business, and making it more convenient for businesses and consumers to sell and buy liquor, thereby removing long queues.
Let us understand what it contains.
1. It has got strict qualifying criteria for who can enter into this business. The fiscal and volume requirements are such that it may not help any small supplier to participate as a wholesaler or even as a retailer.
2. The yearly license fees include the entire excise duty for the year. Thereafter 1% of the excise duty will be payable. This is to prevent the leakage of excise duty post-sale.
3. The number of retail liquor vends is restricted to 849, including five super-premium retail vends. These retail vends are carefully located to ensure minimum commute time for the people who will consume them.
4. There have been inbuilt requirements to avoid conflicts of interest between retailers, wholesalers, and manufacturers. The categorization of various liquor brands and separate treatment for each of them has been clearly defined.
5. It has separate policies for Hotels, Motels, Party Places, Event Venues, Clubs, Restaurants, and Banquet Halls to give a boost to the hospitality sector and make it easier to operate. This also includes allowing bars and restaurants to operate till 3 AM.
Seemingly, it appears to be a well-meaning initiative to deal with revenue leakage and improve the fiscal situation, promote hospitality, make access to liquor easier, make policies simpler for everyone, and make it harder for those who want to avoid taxes. So, what went wrong?
Devil is in the Details
The controversy erupted when the allegations of corruption were leveled against AAP ministers. AAP is a political party that has emerged from the anti-corruption movement. It was alleged that the policy favors certain businesses and there is a loss of excise duty as a result of this. LG of Delhi ordered a CBI probe into allegations of wrongdoing. So what are the allegations? Let us see them all.
Allegation #1: There is a loss of excise duty and retailers will make windfall gains.
The math behind this excise loss is represented below.
Example of 750ML A particular Brand
As per Old Policy which was effective before the new policy.
Wholesale Price: ₹166.73
Excise Duty: ₹223.88
VAT: ₹106.00
Retailer commission: ₹ 33.39
MRP: ₹530.00
As per Delhi’s new Liquor Policy:-
Wholesale Price: ₹188.41
Excise Duty: ₹1.88
VAT: ₹1.90
Retailer commission: ₹ 363.27
Additional excise: ₹ 4.54
MRP: ₹560.00
Thus, the government’s earnings on a bottle in the old liquor policy were 329.89, and in the new liquor policy only 8.32. That is a loss to the government of ₹ 321.57 per 750 bottles in the example given above due to the new policy. In the old policy, the retailer’s commission would be 33.39 whereas, in the new policy, the retailer’s commission was Rs 363.27 for a few months, i.e., making a profit to the retailer of ₹ 330.12 per bottle.
This WhatsApp message started circulating and this gives the impression that the Delhi Government has passed on the entire benefit of excise to private parties. A cursory look at the data will uncover the fraudulent aspect of the message. No state Government will do such a glaring mistake to reduce its excise duty to almost nil and pass it back to the retailers. The fiscal situation of the state (Delhi) which has an excellent track record of the surplus will ruin it in a year.
The important point is hidden in clause 4.2 of the Policy which states and I quote: -
If we represent the various license fees in a tabular format, which incorporates the VAT and Excise, it will look like this.
The devil is in the details as half-truth was circulated on various WhatsApp groups and on media to mislead people and think bad about this policy and create a public perception of corruption and wrongdoing. If we see the details, there is no loss of excise duty but a gain of INR 3,500 crores per year as the Government was losing it earlier due to illegal sales.
The new excise policy collects the excise in advance and hence retailers are recovering the same from the consumers. However, Delhi Government has failed in its communication and not in its intention, which was royally exploited by the vested interests and lobbies who thrived on the previous policy.
Allegation #2: There has been foul play behind the scenes.
The allegation is that the policy restricts the business to certain powerful groups that can only participate in the process as they have deep pockets. Yes, the negative fallout of this policy is an entry barrier for smaller businesses. This is a trade-off between whether to have multiple players or have some regulated large companies in this grey and shady world of booze.
The way I see that this is a considerable challenge to drive any standardization in this choppy market. Standardization is always preceded by consolidation. The market consolidation requires some validations for who can play a role as we are talking about upfront payment of the entire year’s excise duty which is impossible for any small player. Should we blame anyone for the entry barrier? It is a debatable topic but yes you can blame Delhi Government for sacrificing some opportunities to achieve the larger interest.
The extended allegation is that it helped AAP leaders to fund their elections. There are numbers floated from INR 10,000 crores to a few crores by opposition leaders. There was no consistency in allegations so far and everyone has floated their own perceptions. Besides, there is no evidence of this alleged corruption against AAP leaders has been produced by agencies who investigated thoroughly and raided their premises multiple times. We don’t know what we don’t know about the truth of this allegation — maybe yes and maybe no. But let us assume this allegation is correct. If it did, then did it cause any loss to businesses or to consumers, or the government? If the answer is no, then not sure what are we chasing. If the policy is good, and the businesses want to reward a party that eliminated the grey market and improved tax revenue along with simplifying their business, helping consumers and businesses at the same time, then is it right or wrong? The concept of morality may vary from person to person, and I refrain from answering it here. Every political party needs money to survive. If AAP may have helped everyone and has been rewarded for this, it will not come to me as a surprise. Of course, if the same has resulted in favorable treatment for a few, then it becomes a matter of concern.
Allegation #3: Why did they withdraw the policy then, if it was so good?
This is the harder question to deal with. I would say Delhi Government failed here. Excise revenue is very critical to funding government initiatives and investments. Delhi Government landed in a mess when the entire system came together to defeat the policy and its endeavor. There were multiple court cases filed against the officials and an atmosphere of fear was prevailing. Besides, there was little support from various pillars of democracy. Possibly, Delhi Government did not anticipate the magnitude of disruption the policy will generate and how the nexus of vested interests will respond. The vested interests wanted to nip this in its bud because if it succeeds, it could become a saga of a change to be replicated elsewhere. No state Government has gone to this extent to declare the war on corruption and the powerful liquor mafia. Hence, it makes sense that if the hero becomes the villain. The blockade of excise revenue due to various court cases led to fiscal challenges, compelling Delhi Government to roll back its policy. The inability to see this change was the biggest failure of the Delhi Government. Besides, Delhi has a peculiar operating model and multiple centers of gravity, which makes it several times more difficult to execute a change.
Conclusion
The intent and content of the policy appear to be correct. The execution was also good, but it is a classic change management failure, where ecosystem impact was not understood in depth. Throughout my life, I have seen many change management failures in seemingly amazing initiatives. A big bang change comes with pain and the inability to understand the aftereffects of change leads to catastrophic failures. Booze is not education or healthcare. It has a cocktail of vested interests, and mafia, working closely with various pillars of democracy that make huge money. It is like a gutter where pigs thrive on filth. If you mess with them, you will stink as well. Sometimes change comes in installments. But I leave it to the common sense of the readers whether it was a matter of corruption or disruption caused by a massive change.
