Karnataka AIB alcohol tax: Come April, Karnataka will be the first state in the country to transition to an Alcohol-in-Beverage (AIB) based excise duty.

In the budget presented on March 6, Chief Minister Siddaramaiah said that “the government administered price fixation will be completely deregulated” under the new policy. Distillers will decide the slabs under which their products will fall, in an effort that the state government hopes will help shore up more revenue.

The government describes AIB as “globally recognised as the gold standard for alcohol taxation, as it directly targets the alcohol content which is the primary source of negative externalities.” This means that the percentage of alcohol in a liquor brand will determine the duty levied on it, effectively ending the existing taxation system.

Revamping the excise duty policy

In Karnataka, alcoholic products currently fall under 16 slabs. A product was designated to a particular slab based on the Declared Price, the selling price determined by the distiller. The Additional Excise Duty levied by the government was dependent on the price per litre of the product, due to which the price of the premium liquor segment was on the higher side.

Over the next four years, the government plans to abolish the slab system of excise duty collection completely. For FY 2026-27, the government will merge multiple slabs and reduce their number from 16 to eight, officials said. A notification regarding the same is likely over the coming week.

Gradually, the government wants to do away with these slabs altogether. “We cannot do it in a go because it will have an adverse effect. We will do it in phases,” Excise Minister RB Thimmapur told The Indian Express.

“Currently, the duty levied for a bulk litre of say, McDowell’s – which is at the lower end, and Blue Label – which is at the higher end, is different and is based on the Declared Price. Both have 42% alcohol. Under the new system, both drinks will attract the same percentage of additional excise duty irrespective of the declared price,” he added.

Impact on excise revenue

Karnataka draws considerable income from the state excise duty levied on alcohol. For the FY 2026-27, the budget targets Rs 45,000 crore in revenue collection. While clarity has not emerged on how the transition will impact revenue, officials predict that the transition will impact the revenue structure once the AIB-based excise duty is fully implemented.

“Around 60% of the excise revenue is from the first few slabs in the existing system,” an official noted, highlighting that duty from cheaper liquor contributed to the lion’s share of the income generated. On the other hand, the premium liquor segment did not generate higher revenue and saw its sales affected by the high prices.

“With the AIB duty structure, we are anticipating the premium sector to add more to the revenue by virtue of increased sales,” he said, indicating that premium liquor prices could see a downward revision.

How merging different price slabs will affect liquor prices will be clear once the new slab structure is notified, the official added.