Delhi Excise Policy 2021-22 fraught with shortcomings, implementation suboptimal: CAG

The others, according to the report, included the “concentration of wholesale (liquor) supply to few entities”, increasing the “risk of monopoly or cartel formation” with wholesale licenses for supply of IMFL (Indian-made foreign liquor) and FL (foreign liquor) being granted to 14 business entities “whereas the same were granted to 77 manufacturers of IMFL and 24 suppliers of FL in the old policy (2020-21).”

The report said that an expert committee, formed to assess the provisions of the new policy, had recommended to the government to take over the wholesale trade of liquor, through a separate ‘state beverage/wholesale corporation’.

While a group of ministers (GoM), which presided over the formulation of the now-retracted policy, accepted “the fact that many wholesalers were able to acquire retail licenses through proxy ownership and make it possible to indulge in sale of non-duty paid liquor”, it still “recommended issue of L-1 licenses to private players only”.

“The reason provided in the GoM report for not forming such government-owned wholesale corporation was that a deep study and implementation of the same would require time and till such time L-1 license should be granted to private players… the idea of forming government-owned wholesale corporation was not new in Delhi,” the report added.

“…it was noted from the finally approved Excise Policy for 2022-23 that the wholesale operation was proposed to be managed by private players, which belied the claims made by government that private wholesale operations was only an interim measure,” it stated.

Another issue noted by the report pertains to the refusal of the GoM to adhere to the expert committee’s suggestion of retaining the collection of excise duty on per bottle basis, while altering the pricing mechanism. “However, the GoM favoured advance collection of excise duty, in the form of license fee, which was practically delinked to the actual sale of liquor… In the Excise Policy 2021-22, revenue was to accrue primarily through license fee, discovered through bidding on reserve price… which subsumed Excise Duty and VAT based on the revenue figures of financial year 2019-20 with a 10% increase for growth,” the report noted.

Applications, the CAG said, were to be invited for the grant of wholesale licenses to those who fulfilled the eligibility criteria – having wholesale distribution experience in the liquor trade for at least five years and minimum turnover of Rs 150 crore every year for the preceding three consecutive financial years.

The wholesale licenses were also, the report said, to be awarded through a public notice inviting applications. It added, while 18 applications were received, one was withdrawn, another was rejected due to incorrect application and two others were rejected during the process.

“The policy framework provided that these wholesalers were to be distributors (not manufacturers), who could tie-up with more than one manufacturer for supply of liquor. However, manufacturer could supply its brands through one wholesaler only. Audit observed that this compulsory tie-up restricted the manufacturers to supply its brands through one wholesaler only,” the report noted.

“…Wholesale licenses for supply of IMFL and FL were granted to 14 business entities under Excise Policy 2021-22, whereas the same were granted to 77 manufacturers of IMFL and 24 suppliers of FL in the old policy (2020-21). This concentration of wholesale supply to few entities increased the risk of monopoly or cartel formation, which was against one of the objectives of the new policy…,” it added.

There was also, the report stated, “an increase of wholesaler/distributor margin from earlier rate of 5% to 12% under the new policy” with the GoM stating that it was necessary “to compensate the higher license fee for global distribution standard, quality checking systems, which basically meant that every L-1 licensee had to set up a government-approved laboratory at their warehouses to randomly check the presence of sub-standard liquor or spurious liquor in each batch received from the manufacturers”.

“…on one hand, the scope of scale of operations and profit margins of the wholesale licensees was enhanced but on the other hand the revenue from license fees was delinked from the same. This should be seen in light of the fact that only three wholesaler accounted for more than 70% of the volume of liquor sold…,” said the report.

It added that 14 entities were allotted 17 retail zones after bidding. These were later found to have wholesaler-retailer relationships.

“There was evidence of relationship between Indospirit, which was a wholesale licensee and the zonal licensee. Khao Gali Restaurants, holding two zones… Wholesale licensee Mahadev Liquor was linked to zonal licensee Bhagwati Transformer Corp, holding two zones, through Common Past Partnership in 2021 and family relations…” noted the report.

“…In the case of the wholesaler, Gautam Wines, it was found that family shareholding connected it to the liquor manufacturers… Popular Spirits LLP was related to a manufacturer Buddy (Punjab) Bottlers Private Limited through common partner/director in 2021…,” it added.

The policy, according to the report, mandated “an exclusive arrangement” between manufacturer and wholesalers, which led to the “entire supply of all brands of a particular manufacturer being controlled by only one wholesaler”.

“…although 367 IMFL brands were registered in Delhi, very few popular brands formed the bulk of sale volume. Top 10 brands accounted for the sale of 46.46% of liquor sold in Delhi whereas top 25 brands accounted for 69.50% of the liquor sold. Of these 25 top selling brands, Brindco and Mahadev Liquor exclusively supplied seven brands each, followed by Indospirit, which exclusively supplied six brands…” the report noted.

“…of the 367 brands of IMFL supplied by 13 wholesale licensees, the highest number of brands were exclusively supplied by Indospirit (76 brands), followed by Mahadev Liquors (71) and Brindco (45). These three wholesalers also accounted for 71.7% of volume of liquor sold in Delhi…,” it said.

The sale of liquor between December 2021 and August 2022 when the new policy remained in place was 64.82 crore bottles compared to 58.19 crore bottles sold during the comparable period of December 2018 to August 2019, the report said.

“…the new policy witnessed an increased sale of around 11.4% compared to the previous regime. However, the new policy did away with the levy and collection of revenue on per bottle basis, in favour of advance revenue collection on presumptive sales figure based on financial year 2019-20,” it noted.

“This emphasis on presumptive revenue collection through bidding also gave an incentive to retailers to ramp up the volume of sale… without concomitant revenue to government.”

An assessment of the previous excise policy, the report said, noted that concerns regarding cartelisation, however, did not crop up only in the new excise policy.

Between 2017-21, as per the report, the excise department could not ensure the prohibition of issue of multiple licenses of different categories (wholesaler, retailer, hotels and restaurants etc) to related parties, “leading to the existence of common directorship among entities holding various license types”.

“It is imperative that cases of cross ownership and proxy ownership among companies applying for licenses, based on criteria like common directorship, percentage share-holding, unsecured loan to companies, be dealt with strictly to avoid unfair practices like cartelisation in liquor trade and brand promotion,” the CAG said.

It also spoke about the pricing of liquor in the old policy, which led to excise revenue reduction of Rs 165 crore. “The excise department allowed discretion to L-1 licensee (manufacturer and wholesaler) to declare its Ex-Distillery Price (EDP), for liquor priced above a certain level. All the price components after manufacture, including profit of the manufacturer, were added thereafter. Audit observed varying EDP in various States for liquor supplied by the same manufacturer unit…” the report noted.

“Further, this discretion allowed L-1 licensee to manipulate prices of liquor to its own advantage, through increase in EDP. Analysis of pricing and sale of a few brands revealed that discretionary EDP led to decline in sales and consequent loss in excise revenue,” it added.

The report further said that the end-to-end tracking of liquor bottles through barcodes was not followed properly because of which, the “objectives of authenticity, traceability and security aspects… could not be achieved”. It said the exchequer lost Rs 23.23 crore as the implementing agency was entitled to payment only for barcodes authenticated by scanning while sale at Point of Sale.