Taxation and Control Over Molasses and Alcohol:Legal Sources, Conflict of Interests and Policy Issues

Increasing sugarcane production and the recent developments in the international oil markets have once again underlined the need for effectively utilising the by-product molasses of sugar production and the use of molasses based alcohol for industrial purposes.

On the other hand, the State Governments have vested interests in diverting as much alcohol for potable purposes because of its revenue potential and scope for political patronage. Our Constitution has singled out potable alcohol by giving the right to levy excise taxes on it exclusively to the State Governments. While the intention of our Constitution behind this is to encourage prohibition, the effects are exactly the opposite.

The concentration of sugarcane and sugar production in some states and the revenue potential of potable alcohol are virtually choking the growth of alcohol based chemical industries and may seriously jeopardize any scope of use of alcohol as an automobile fuel even if justified on techno-economic grounds.

This paper structures the above developments as an illustration of a set of hypotheses on the dynamics of any system of controls/subsidies; how they originate, become complex, gradually lose relevance and ultimately become damaging. This paper identifies very important and urgent policy issues and suggests that we need to relook at our Constitutional provisions related to prohibition.

An attempt has been made to put these issues in the context of the ongoing debate on Centre-State financial relations and this paper warns against decentralisation of taxation powers. More importantly, this paper highlights the irony of some state governments financing their popular welfare schemes from revenue generated out of potable alcohol consumed by the very same poor who are supposed to be the beneficiaries of these welfare schemes.

An incidental but nevertheless important aspect is how a raw material (molasses) ‘valued’ at a meagre Rs 90 crore per year, eventually fetches around Rs 3,000 crore per year from the ultimate consumers, without any significant processing in between.