A radical reform of excise system

By linking taxation to alcohol strength, Karnataka is taking a huge step towards addressing the social cost of spirit consumption

For 60 years, Karnataka’s excise system has operated on a logic that has largely remained unchanged. 

It was created and nurtured in an era of manual supervision, physical controls, and a primary focus on stable revenue generation. While this framework has served our fiscal needs, the world around us—and our understanding of the social impact of alcohol—has evolved profoundly.

In the 2026 Budget speech, Chief Minister Siddaramaiah initiated a landmark reform of the state’s alcohol excise taxation and regulation. The draft excise duty structure to give effect to some of the Budget speech announcements has been notified last week. This is not merely a technical adjustment of tax slabs; it is a fundamental redesign of the system from its foundations. 

For the first time, a state in India is moving away from a model that prioritises revenue maximisation to one that balances public health, social responsibility, and the reduction of harm.

Over the last year, the Revenue Mobilisation Committee (RMC) constituted by the Government of Karnataka (GoK) has made a number of recommendations to improve the state’s fiscal capacity and governance. The RMC’s draft report on excise reforms was recently submitted to the government and has recommended sweeping and fundamental reforms to excise taxation and alcohol regulation in the state.

The primary reason for this reform is the undeniable social cost of alcohol consumption. Studies suggest that alcohol-related harm costs between 1.45 per cent to 2.6 per cent of GDP. In line with this national trend, and available evidence indicating that Karnataka experiences relatively higher socioeconomic burdens, at the midpoint of 2 per cent, the social cost in Karnataka would be approximately Rs 51,000 crore annually.

These are not just abstract numbers; these are costs paid every day by Karnataka’s families in the form of domestic violence; they are paid on our roads, where thousands of preventable deaths and injuries are caused by drunk driving; they are paid by our overstretched public health system, which must absorb the burden of liver disease and alcohol use disorders. Most tragically, these costs are paid by our poorest households, where scarce income is often diverted from food, education, and healthcare toward alcohol.

This should not however lead to lazy knee-jerk reactions, like imposition of prohibition. There is overwhelming evidence from Indian states and the rest of the world that prohibition does not work. In reality, the ‘cure’ is worse than the original disease, as it is known to institutionalise corruption, stretch limited capacity of the state enforcement machinery without eliminating the underlying problem of irresponsible drinking.

Our current tax system is, unfortunately, poorly designed to address
the realities of the social costs mentioned above. 

It taxes alcohol based on price and product category rather than the actual alcohol content. This creates a perverse situation where “economy” liquor—the highest-strength and most harmful segment—is under-taxed relative to the harm it causes, while premium products are over-taxed. 

The Karnataka State Excise Reforms 2026 are built upon four ‘First Principles’:

Strength-based taxation: The harm caused by beverages is directly related to the amount of alcohol consumed. Therefore, a tax levied per litre of pure alcohol (Alcohol-in-Beverage or LAIB) ensures that every beverage is taxed in proportion to its potential for harm.

Internalising social cost: We have established a “Social Cost Benchmark”—approximately Rs 2,000 per litre of pure alcohol in the next three to four years. Our goal is to align our tax rates with this benchmark so that the price of alcohol reflects the external costs it imposes on society. 

Nudging behaviour towards moderation: By taxing alcohol content, we provide a clear incentive for both producers and consumers to shift towards lower-strength beverages in keeping with global practices. 

Modernising governance: We are moving away from an outdated system of “permit raj” and manual inspections towards digital track-and-trace technology to ensure compliance, transparency, and the elimination of illicit trade. 

Recognising that such a deep structural shift cannot happen overnight, we have suggested a clear glide path:

Phase 1 (FY 2026-2027): The GoK has already begun this phase by rationalising price slabs from 16 to eight. This year, the state proposes to introduce a hybrid tax structure, combining a uniform duty linked to alcohol content with a simplified additional duty to smoothen the transition. We are conscious that the proposed reform, linked as it is with alcohol content, will perhaps lead to an increase in prices in some segments and to a drop in others. The endeavour has been to ensure that the changes
are marginal.

Phase 2 (FY 2027-2028): The government will continue to calibrate rates toward the social cost benchmark while rolling out digital track-and-trace systems across the state.

Phase 3 (FY 2029-2030)): The reformed system will hopefully be fully operational, with the excise rate indexed to nominal GSDP growth to ensure the tax automatically tracks the evolving social cost of alcohol.

A key pillar of this reform is ensuring that a part of the revenue collected from these corrective taxes is used to heal the wounds caused by alcohol. 

The RMC has recommended legislating a dedicated allocation of excise revenue for four critical areas: de-addiction and mental health services, road safety, domestic violence prevention, and youth education. This responsibility will be with the Department of Health and Family Welfare, which is best placed to handle this. 

The RMC’s draft report on excise has been placed in the public domain. We are inviting all stakeholders—public health experts, manufacturers, retailers, and, most importantly, the citizens of Karnataka—to engage with the RMC. 

We do not claim to have all the answers. Reforming a 60-year-old system is a complex task that requires collective wisdom. 

(The author is a former Karnataka cadre civil servant and chairs the RMC)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.