Applicability of GST on Extra Neutral Alcohol (‘ENA’) – The Mystery Continues

It is now more than 1000 days of GST in India. The accepted fact by many was that the new law would have lot of challenges and uncertainty in the first two years, which would require numerous changes and amendments. Many issues have been resolved, some aspects have been deferred and some have been left in the balance which would probably settle by 2021. One issue which has been left in the balance, is the issue of taxability of Extra Neutral Alcohol (‘ENA’) under GST.

There is no dispute on the levy of GST on denatured ENA (industrial alcohol) and the dispute is only on ENA which is used for manufacture of alcoholic liquor for human consumption. The Sugar Industries across India have taken different positions on such undenatured ENA and the irony is that even the State Governments do not have a uniform view on the said issue. Certain State Governments have opined that ENA is a subject matter of State levy and not covered under the purview of GST.

Though one may suggest that the levy has to be seen with reference to Section 9 of the CGST Act, 2017 it is also important to understand the background of the issue and the constitutional validity of levy of GST on ENA. 

What is ENA?

ENA is highly concentrated ethanol which has been purified by means of repeated distillation, a process that is called rectification. ENA has about 95% alcohol content and is highly concentrated. It is derived from different sources such as sugarcane molasses and grains and is primarily used in the manufacture of alcoholic liquor. ENA is also an ingredient for the pharmaceutical industry and personal care products such as perfumes, toiletries, hair spray etc. 

Whether ENA is covered in the State List under the Constitution?

Entry 51 to State List (List II of Seventh Schedule) as amended, provides that the State Government can levy duties of excise on manufacture or production of alcoholic liquor for human consumption, in the State.

Further, Entry 54 to State List (List II of Seventh Schedule) as amended, provides that the State Government can collect taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption. The said entry provides powers to the State Government to collect taxes on sale of alcoholic liquor for human consumption.

It is amply clear that List II covers only alcoholic liquor for human consumption and does not cover alcohol which is not for human consumption. Though alcohol is the primary raw material for production of alcoholic liquor, both goods cannot be considered to be the same. Further, alcohol which is of high concentration, can by no means be consumed by humans. Hence, it is clear that the State List under the Constitution of India, does not cover ENA. 

Levy under GST – Whether ENA is covered?

Section 9 of the CGST Act, 2017 provides that there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption. The specific product kept outside the purview of GST is only Alcoholic liquor (final product) and not the raw material / intermediary products used for manufacture/production of the said product. The Seven Judge Constitution Bench of the Supreme Court in the case of Synthetics and Chemicals Ltd Vs. State of UP and Others (1990 1 SCC 109), held that ENA cannot be considered as alcoholic liquor for human consumption.

As per Notification 01/2017-Central Tax (Rate) dt.28.06.2017, there is no specific entry for Undenatured Ethyl Alcohol. The only specific tariff provided with regard to ENA is in relation to Ethyl alcohol and other spirits, denatured, of any strength (HSN 2207 under Sl.no. 25 of Schedule III). It is important to note that there is a residual entry provided in Schedule III Sl.no.453 covering goods of any Chapter which are not specified in Schedule I, II, IV, V or VI. Since Undenatured ENA (HSN 22071011) is not specifically covered under any of the Schedules, can it would be covered under Sl.no.453 o Schedule III.

Further, it may be noted that Explanation (iii) of the above referred notification provides that Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975). Undenatured ENA is covered as a specific tariff entry under Customs Tariff Act, 1975 under HSN 22071011 and hence the said goods would also be covered under Schedule III of the above referred notification. 

Discussions of the GST Council and the Opinion of the Attorney General

The issue as to whether ENA is covered under GST or a subject matter of State levy was specifically discussed in the 20^th GST Council Meeting held on 05.08.2017. Para 37 & 38 of the minutes of the meeting, specifically provide for the discussions made during the said meeting. The Joint Secretary (TRU-I),CBEC had opined that ENA is covered under the levy of GST, with reference to the decision of Seven Judge Constitution Bench of the Supreme Court in the case of Synthetics and Chemicals Ltd. The Joint Secretary (TRU-I),CBEC had also recommended to exempt GST on ENA, as it would adversely impact the manufacturers of alcoholic liquor.

However, due to objections raised by certain States on the said subject, the Council had decided that the issue be referred to the Attorney General of India for a legal opinion, and till such time status quo shall continue, i.e. ENA supplied for industrial purpose shall attract GST at 18%. The Attorney General of India in their legal opinion (reference no.AG 16/2017-Adv.C dt.23.12.2017) had analysed the said issue and for the reasons analysed in their opinion had concluded that ENA would be covered under GST.

The issue was part of the GST Council Meeting agenda in the 26^th meeting held on 10.03.2018 and the same was deferred due to shortage of time. Once again in the 31^st GST Council Meeting held on 22.12.2018 no decision was taken on the said issue, even after taking note of the opinion of the Attorney General of India and it was decided that status quo would continue till any decision is taken. No conclusion on the said issue has been made by the GST Council on the said issue, and status quo continues. 

Way Forward

The issue of levy of GST on ENA is becoming a mystery, even after the legal opinion of the Attorney General of India has been clearly provided. One Nation One Tax, the primary motto of introduction of GST, appears to be defeated as a single product is being treated differently by different State Governments and the levy differs from State to State. The irony could be that one Company having presence in more than one State, may be forced to adopt different tax treatment of the same product. For uniformity of levy and to bring conclusion to the long outstanding agenda, we hope that the decision on the pending issue is taken by the GST Council. 

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