prpri Extra Neutral Alcohol (ENA) – A Nascent Under GST Extra Neutral Alcohol (ENA) – A Nascent Under GST

The Future potential in the field of taxation will have many gearing troubles. GST as well is not an exception to it. In its path to perfection, GST has much dust to settle-legislatively and judicially. These are the days of confusion and cacophony: many views, many interpretations, and many jurisprudential mumblings.

And in this running scenario of confusions, one more issue was prevailing over the couple of years ever since GST has been introduced – Whether GST would be levy on Extra Neutral Alcohol (ENA) which is 95% “alcoholic liquor”?

Before moving further, let us understate what is Extra Neutral Alcohol (ENA):

“ENA typically contains 95% alcohol by volume and as such is not fit for    human consumption. Under article 246A (1) read with 366(12A), GST cannot be levied on the supply of “alcoholic liquor for human consumption”. ENA that  is used for `manufacture of alcoholic liquor is not supply for the purpose of     human consumption as it is not consumed directly, but goes through a process of manufacture”.

The overhang of possible inclusion of extra neutral alcohol within the ambit of the goods and services tax (GST) remains, and the potential impact from this could knock off 10% to 15% from EBITDA (operating profit before tax) of these Industries. However, while centre keen to impose this levy, many states are opposed to it as they feel that to tax it is their right.

The alcoholic beverages industry is heavily regulated, with excise and other taxes forming an important source of revenue for state governments. While alcoholic liquor for human consumption, or potable alcohol, has always been out of the GST, its main input ENA is a grey area which several analysts assumed could be included. But due to non-availability of any clarification practical issues and challenges were faced by the liquor industries as on date and it leads to loss of credit to industry due to heterogeneity between states with respect to levy of Central sales tax or Goods and services tax both on ENA.

However, Himachal Government has gone one step ahead. In a recent development, one of the GST Departments has clarified that GST would be applicable on the supply of ENA which is used for the manufacture of alcoholic liquor meant for human consumption. This has been done after obtaining legal opinion from Attorney General of India. According to this clarification vide Endst No. 12-13/2018-19 EXN–GST-23205-23223 dated 01.08.2018, issued by Commissioner of State Tax and Excise, Himachal Pradesh, the supplier of ENA are required to be registered under GST Act and GST is to be levied on the supply of ENA @18% GST in terms of Entry No. 25 of Schedule-III of the Notification No. 1/2017-State Tax (Rate), dated 30.06.2017 and 1/2017-CT (Rate) dated 28.06.2018.

Whereas, the judgment of the court in   “Bihar Distillery” does not denude the Centre or the States of the power  to levy GST on ENA that is used to manufacturing alcoholic liquor for human consumption’

On sub merged reading of all the above clarifications as available state wise, it can be concluded that GST will be applicable on the supply of ENA which is used for the manufacturing of alcoholic liquor for human consumption and the supply of ENA is exigible to be taxed @ 18% GST.

It is further noted that industrial alcohol is already under the GST. On ENA being taxed to GST, alco-beverages sector will enter another complex situation, viz, ENA being subjected to GST whereas output, i.e., alco-beverages being out of GST net, leading to enhanced cost of production without any set off benefit of input taxes in the form of GST. While it may be technically correct to levy GST on ENA as it is not a potable liquor (meant for human consumption), yet it will bring in more distortions but of course, more revenue too to the exchequer. However, the VAT paid on the purchase of ENA can be used as a set-off on the VAT payable on sale of potable alcohol. But, if ENA is subject to the GST, input tax credit will no longer be available. While ENA is a major input for alco-beverage sector, it is also used in cosmetic, pharmaceutical and perfume formulations. There it would be allowed a set off and will therefore, be a welcome change.

GST or no GST, be it on raw material and inputs or the output supply, alco-beverage sector is facing challenge on costing front which accrues because of GST. The only possible solution lies in two fold strategy -one, to remove GST on all major inputs and two, bring both inputs and output under GST ambit.

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July 2021