Liquor license in India: auctions vs. lottery system

Abstract

Currently, lice use for retail liquor shops in India is highly regulated and assigned majorly through lottery or auctions. These two methods come with their own set of advantages and problems, with revenue generated from the process and ease of New entry being the major ones. While there is scope to generate the maximum possible revenue with the right auction process, new entries can be significantly impacted due to the presence of cartels and high entry barriers. The analysis is done for the state of Telangana, which currently follows the lottery system but has a history of using the auctions method in the past. In the current system, the licenses are open to everyone with a few licenses reserved for BCs, SCs and STs. The process has three stages, i.e., Invitation of applications, Lucky draw of the applications, and Allotment after payment of stipulated taxes. There is a constant application fee of 2lakhs for all the stores, which is being revised from time to time. Upon winning the lottery in stage 2, the winners should pay a special retail excise tax (SRET) of 5 lakhs which is constant for all the stores, and a Retail shop excise tax (RSET) which ranges from 55 lakhs to 1.1 crores per annum which are pre-decided by the excise department. Licenses are allocated for a period of 2 years. If any stores are left without applicants or the winning candidate fails to pay the amount, the shops are put for the lottery again or run by the excise department. A conservative estimate of the financial figures for running a store showed that an average liquor store has a turnover between 9-15 crores per year with a margin close to 20% before costs. Every liquor store incurs the RSET, SRET, rent, labor, and transportation costs which is nearly 1.3 crore per annum, bringing down the margin close to 9% on sales, 73% in investment made, and a final profit of nearly 75 lakhs/ year. These figures indicate that there is a significant margin on investment for retail store owners. The additional surplus can be captured by the government by implementing an effective auction system. The further steps of the project will involve a better estimation of the value of a store, identifying the bottlenecks and pitfalls in a simple auction system, and designing an appropriate system if needed to achieve the said goals.