Alcohol industry in India stands third largest in the world with value of $35 billion, making it a significant contributor to the Indian economy.1 Kerala tops the charts in the
level of consumption of liquor as it has the highest per capita consumption of alcohol in the country. Alcohol is a demerit good as its consumption results in socially undesirable outcomes in the form of externalities in terms of increased prevalence of road accidents, health care costs and accounting for about 69% of all crimes in Kerala. However, the liquor industry makes significant contributions to the Keralan economy in the form of tax revenue and employment. In order to limit the economic costs of alcohol consumption, the Keralan government proposed an upsurge in the indirect taxation of alcohol. However, this affects the street price by a little margin as other taxes such as the sales tax have been removed. Regardless of the prohibitive cess on liquor and introduction of dry days and the continuous increase in the taxes have interestingly enough, showcased an upward spiral trend in the sale of liquor. Indirect taxation not only serves as a catalyst to generate revenue to aid government’s macroeconomic objectives but to also curb the negative consumption externalities. Therefore, the research question that stems from the aforementioned topic is: “To what extent has the increase in liquor tax in Kerala impacted the externalities associated with it since 2018?”