Does
the underpayment of taxes on liquor sales in Sikkim mirrors the issues seen
with Delhi’s recent excise policy case? A recent audit
report by the Comptroller and Auditor General of
India (CAG) revealed that the Sikkim Government under-collected Rs. 130.86
crores in sales tax on liquor sales. This startling discrepancy, unearthed
during the review of Government performance for 2020-21 and 2021-22 by the CAG,
throws light on several deficiencies in revenue collection across sectors such
as Social, Economic, and General Services. The report, prepared in compliance
with Article 151 of the Constitution of India, faced delays in being made public
as it awaited tabling at the state assembly.
The
CAG carries out three types of audits: Financial, Performance, and Compliance.
Financial audits provide opinions on the state government financial statements,
while performance audits examine the economy, efficiency, and effectiveness of
government projects. Compliance audits, however, focus on transactions related
to expenditure, receipts, assets, and liabilities. The audit process
involves a sample check of transactions and events, which may not uncover all
government weaknesses. The report under discussion identified several
shortcomings in the Sikkim government. One crucial audit finding, highlighted
in the Sikkim Express on August 28, 2024, was the significant under-collection of sales tax on
liquor.
Since
the article focuses on tax issues related to liquor sales, it is pertinent to
draw a parallel with the recent controversial excise policy in Delhi. The Delhi
government introduced a new excise policy in November 2021, but it was
cancelled in August 2022 amid allegations of financial favouritism. The policy
was designed to increase the state revenue by withdrawing the government’s
involvement in direct liquor retail, reducing the legal drinking age from 25 to
18, and expanding the vending license fee from Rs. 8 lakhs to Rs. 75 lakhs.
Following accusations of irregularities during the tender allotment, the
Lieutenant Governor of Delhi recommended a Central Bureau of Investigation
(CBI) probe, pointing to potential losses amounting to Rs. 580 crore to the
state exchequer. An investigation by the Enforcement Directorate alleged
kickbacks to the party in power from a group of liquor distributors in exchange
for the grant of licenses. Several arrests followed, including the Deputy Chief
Minister and, most recently, the Delhi Chief Minister on March 21, 2024.
Unlike
Delhi and several other states, the government in Sikkim does not engage in
liquor retail. Instead, private entities are permitted to sell liquor across
the state. This has led to a significant rise in alcohol consumption, with
consumption surpassing the national average by more than twofold, making it a noteworthy subject
for investigation. However, this article will focus on the government’s tax
collection from liquor sales. Among the northeastern and Himalayan states,
Sikkim stands out for its tax revenue as a percentage of its Gross State
Domestic Product (GSDP). Sales tax from liquor
constitutes a large portion of this revenue, so the discovery of a shortfall by
the auditor raises serious concerns.
Under
the Sikkim Sales Tax (SST) Act of 1983, all dealers selling goods in Sikkim must pay sales tax.
A government notification issued on November 20, 2015, sets the sales tax rate
on alcoholic beverages at 25%. Distilleries, breweries, and licensed liquor
importers are considered registered dealers and represent the primary point of
sale. This implies that once liquor leaves their warehouses, it is regarded as
a sale for the purpose of sales tax. Two government departments record liquor
sales in Sikkim: the Excise Department, which tracks the originating data, and
the Commercial Tax Department, which relies on sales returns furnished by
manufacturers and dealers. While the Excise Department collects excise duty
under the Sikkim Excise Act of 1992, the
Commercial Tax Department is tasked with collecting sales tax from
distilleries, breweries, and licensed importers.
As
presented in figure 1, the audit observed a discrepancy in sales data provided
by these two departments in case of seven dealers/ manufacturers, amounting to
Rs. 633.49 crore. The differences in the data provided by the Excise Department
and the sales returns furnished by manufacturers and dealers were most
pronounced for Sikkim Distilleries, followed by Krishna Trade Links, Shruti
Warehouse, Lahag, and Pawan Kumar Gurung.
Figure 1: Sales
data, Excise vs. Commercial Tax department.
Source: Report of
the CAG on Social, Economic, Revenue and General Sectors for the year ended
March 31, 2022.
In
the figure 2 below, you will find a list of dealers/manufacturers identified for
short payment of sales tax by the CAG on their liquor sales. The total
estimated loss in sales tax amounts to Rs. 130.86 crores, with Sikkim
Distilleries being the biggest contributor at Rs. 53.26 crores. Other
significant contributors include Pawan Kumar Gurung, Lahag, Shruti Warehouse,
Krishna Trade Links, and Denzong Albrew.
Figure 2:
Shortfall in payment of Sales Tax.
Source: Report of
the CAG on Social, Economic, Revenue and General Sectors for the year ended
March 31, 2022.
The
commercial tax department’s assertion that comparing the turnover recorded with
them to the turnover recorded by the excise department is unfair due to
differing levy incidences lacks substantiation. It is important to note that
the commercial tax department’s argument for variance in the sales turnover is
refuted by the case of Mount Distilleries, wherein the sales recorded by the
excise department align with the sales returns furnished by the dealer and tax
payments for 2018-2021. The audit also rejected the tax department’s claim that
the discounts and sales returns could be the reason for variance since the
Sales Tax Act does not permit such deductions. The audit firmly dismissed the
attempt by the department to justify the suppressed sales data by comparing it
to the state’s population, observing that factors such as tourism and
cross-border trafficking could influence sales figures.
While
the Delhi excise policy case and the under-collection of sales tax in Sikkim
differ in terms of the direct involvement of political parties, both involve
significant losses of revenue for their respective states. It remains to be
investigated whether the loss of state revenue has benefited any political
party in Sikkim, as alleged in the Delhi excise policy case. The potential loss
of Rs. 130.86 crores in sales tax in Sikkim far surpasses the state's yearly
motor vehicle tax collection by about three times. In Delhi, investigations are
ongoing, and the potential revenue loss in Sikkim also demands serious
attention. The CAG has recommended that the government take steps to recover
the lost tax revenue from defaulters and improve interdepartmental
coordination.
In
his recent budget speech, the Honorable Chief Minister of Sikkim stressed the
importance of revenue augmentation. We hope that the concerned departments will address the
issue of revenue leakage, and align their actions with the government’s
objectives.
(Views are personal. Email: cbchhetri.ewa@gmail.com)
