Summary: In India, the taxation of Extra Neutral Alcohol (ENA), a vital input for alcoholic beverages, has been contentious due to its dual usage in both potable and industrial applications. While alcoholic liquor for human consumption is exclusively taxed by the States, the Centre has argued for GST applicability on ENA, leading to confusion and disputes over Input Tax Credit (ITC) mechanisms. The GST Council has held multiple meetings to address the taxability of ENA, recognizing the significant proportions of ENA in both Indian Made Foreign Liquor (IMFL) and Indian Made Indian Liquor (IMIL). Following recommendations from the 52nd GST Council Meeting, ENA is set to be excluded from GST when used in the manufacture of alcoholic beverages for human consumption, reflecting the constitutional provisions that grant States the power to tax such goods. This exclusion is expected to alleviate the financial burden on the liquor industry, which has faced complications from dual taxation. The new legislative amendments will take effect from November 1, 2024, clarifying the tax structure for ENA and supporting the industry by reducing overall costs.
In India, the power to levy taxes on alcoholic beverages is vested solely with the States and not with the Union. Extra Neutral Alcohol (“ENA”), a key input for the alcoholic beverages industry, was in dispute as subject to the levy of GST, while the final output, being alcoholic liquor for human consumption, is excluded from the ambit of GST and is instead subjected to State taxes. This has created a recurring challenge for the industry over the past seven years, distorting the Input Tax Credit (“ITC”) mechanism, as the GST paid on ENA cannot be offset against the non-GST state levies on the final product. However, there was growing optimism that substantial relief may soon be provided, potentially reducing the overall cost burden on the industry.
In the context of alcoholic beverages, it is pertinent to note that in India Made Foreign Liquor (“IMFL”), approximately 43% of the content is ENA, whereas in India Made Indian Liquor (“IMIL”), about 35% of the content constitutes ENA. Given this significant usage, ENA is considered a major raw material in the production of alcoholic beverages.
The taxability of ENA, a form of denatured alcohol primarily used as a raw material in the production of liquor for human consumption, has been a contentious issue between the Centre and the States. The Centre asserts that the supply of denatured alcohol, including ENA, falls within the ambit of GST, while the States maintain that they hold the exclusive authority to levy VAT on ENA. This has led to a dual taxation scenario where both GST and VAT are being imposed on ENA. Several States have issued notifications subjecting ENA to VAT, further complicating the tax structure. As a result, the liquor industry has made numerous representations seeking clarification on the applicability of GST to ENA, urging the resolution of this dual levy issue.
Under GST, there is no dispute on the levy of tax on denatured ENA (industrial alcohol), and the issue arises only in the case of ENA, which is used for the manufacture of alcoholic liquor meant for human consumption. The sugar industries across India have taken different positions on such undenatured ENA, and even the State Governments do not have a uniform view on the said issue.
Owing to a lack of clarity on the matter, divergent practices are being followed by manufacturers or suppliers where a few of them are paying GST on the sale of ENA while the others are paying VAT/Central Sales Tax (CST), treating it akin to ‘alcoholic liquor for human consumption,’ a commodity outside the purview of GST.
These divergent practices have wide implications on revenue, and hence the issue has been deliberated several times in various GST Council meetings.
Legal precedence on the taxability of ENA under the pre-GST regime:
In the past, this issue of taxability on ENA under state excise has been deliberated in several judgements. In the case of the State of UP vs Modi Distillery[1995 SCC (5) 753], the Apex Court relied upon the judgement of the Constitution Bench in the case of Synthetics and Chemicals Ltd v. State of U.P. [(1990) 1 SCC 109] and held that the state can levy excise duty on alcoholic liquor fit for human consumption only when its manufacture is complete and not on the raw material or input still in the process of being rendered fit for human consumption.
However, the judgement of the Apex Court in the case of Bihar Distillery and Anr vs Union of India[1997 (2) SCC 727] was distinguished from the landmark case of Synthetics and Chemicals Ltd. (supra) on the point that the latter judgement did not consider spirits that can be diluted to render them fit for human consumption. It was stated that the case of Synthetics and Chemicals Ltd. only dealt with alcohol that could be used for industrial purposes, i.e., denatured rectified spirit. A situation where the rectified spirit would be used entirely for making alcohol fit for human consumption was considered by the court in the case of Bihar Distillery, and it was held that in so far as the spirit was used for manufacturing potable liquor, the power to levy excise duty would vest with the State Governments, thereby, equating such spirits to alcohol fit for human consumption.
Hon’ble Patna High Court, in the case of New Swadeshi Sugar Mills Ltd. vs the State of Bihar, held that ENA, an industrial item, can be put to diverse commercial use other than human consumption and is rendered fit for human consumption only after it is used as raw material. The Division Bench examined various constitutional provisions and reached the conclusion that no state excise duty can be levied on ENA before it is rendered fit for human consumption.
Furthermore, a three-Judge Bench examined the issue in the case of Deccan Sugar and Abkari Co. Ltd. vs Commissioner of Excise, A.P. [(2004) 1 SCC 243] and upheld the validity of the decision of the Constitution Bench in the case of Synthetics and Chemicals Ltd. (supra) without expressly overruling the judgement of Bihar Distillery (supra).
The Allahabad High Court, in the case of Jain Distillery Private Limited vs. State of UP and Others [[2022] 96 G S.T.R. 38 (All)], held that ENA is not covered under ‘alcoholic liquor for human consumption’ and therefore is subject to GST. However, this issue will attain finality only when it reaches the Supreme Court and a final decision is pronounced on the matter.
Upon perusal of the aforementioned rulings, it is still not clear whether the taxability of ENA would fall under the State or Union Legislature, as the Apex Court has pronounced contrary rulings in different cases.
Recommendations of the 20th GST Council Meeting held on August 05, 2017:
In 20th GST Council Meeting, the States, particularly West Bengal, argue that based on the Bihar Distillery v. Union of India [(1997) 2 SCC 727] case, ENA falls under their jurisdiction as it can be diverted between potable and industrial use, and hence, should attract VAT. In contrast, the Central Government refers to the Synthetics and Chemicals Ltd v. State of U.P. [(1990) 1 SCC 109] case decided by seven benches of the Supreme Court, which held that:
“The expression ‘alcoholic liquor for human consumption’ was meant and still means that liquor which, as it is, is consumable in the sense capable of being taken by human beings as such as beverage of drinks. Hence, the expression under Entry 84 List I must be understood in this light.”
To address this conflict, the GST Council discussed the possibility of exempting ENA used for alcoholic liquor for human consumption from GST, pending a legal opinion from the Attorney General of India. The Council also noted that until a legal clarification is obtained, status quo would prevail, with GST applicable only to ENA used for industrial purposes. Additionally, the Council suggested that State officers and Council members should be given the opportunity to present their views directly to the Attorney General before a final decision is made.
Recommendations of the 31st GST Council Meeting held on October 31, 2018:
In 31st GST Council meeting, the Hon’ble Minister from Kerala raised concerns about the ongoing uncertainty regarding the taxability of ENA under GST. He recalled that in the 20th GST Council Meeting held on August 05, 2017, it was decided to maintain the status quo until the Attorney General of India’s opinion on the matter was received. The Attorney General’s opinion, received months ago, clarified that GST could be levied on ENA used for industrial purposes but not for food or potable alcohol. However, field-level officers in Kerala were interpreting this to impose 18% GST on ENA used for manufacturing potable alcohol, causing confusion.
The Minister from Kerala urged the Council to make a clear decision, suggesting that the status quo continue until the Council reached a final resolution. The Minister from West Bengal also highlighted that ENA has dual uses for industrial and for potable alcohol and it needed to be decided whether ENA used for producing alcoholic liquor was liable to GST. The Chairperson agreed that the status quo should continue and emphasized the need to resolve the issue in the Council at the earliest.
The Council agreed to maintain the status quo and bring the matter up for decision soon.
Recommendations of the 52nd GST Council Meeting held on October 07, 2023:
The 52nd GST Council made several significant recommendations regarding the taxation of ENA and other related items. Firstly, was decided to exclude ENA, when used for the manufacture of alcoholic liquor for human consumption, from the ambit of GST. To formalize this decision, the Law Committee will explore the necessary amendments to the legislation.
Secondly, the Council recommended reducing the GST rate on molasses from 28% to 5%. This reduction aims to enhance liquidity for sugar mills, facilitating faster payment of dues to sugarcane farmers. Furthermore, lowering the GST on molasses is expected to decrease production costs for cattle feed, as molasses is a key ingredient in its formulation.
Additionally, the Council announced the creation of a separate tariff HSN code at the 8-digit level within the Customs Tariff Act specifically for rectified spirit intended for industrial use. This move was complemented by amending the GST rate notification to establish a new entry for ENA used in industrial applications, which will attract an 18% GST rate.
Overall, these recommendations reflect the Council’s intent to provide clarity in the taxation of ENA and related products while also supporting the agricultural and industrial sectors through tax reductions.
Here, it is imperative to discuss the constitutional provisions and the power of the Centre and the State(s) to levy tax on the supply of ENA. As per Article 246(3) read with Entry 54 of the State List of the Constitution, the power to levy tax on the sale of alcoholic liquor for human consumption vests exclusively with the State. Similarly, Entry 51 of the State List empowers the State Government to levy excise duties on alcoholic liquor for human consumption. Further, Entry 8 of the State List empowers the State Legislature to make laws with respect to the production, manufacture, possession, transport, purchase and sale of intoxicating liquors.
Article 366(12A) of the Constitution defines ‘goods and services tax’ to mean any tax on the supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption. Furthermore, Article 246A(1) empowers the Parliament and the Legislature of every State to make laws for the levy of goods and services tax. In the exercise of this power, the Parliament and the Legislative Assembly of every State have enacted the GST Act for the levy and collection of tax on the supply of goods and services excluding the levy of GST on the supply of alcoholic liquor for human consumption.
In the light of existing provisions, GST is not leviable on the supply of alcoholic liquor for human consumption. The power to tax such liquor exclusively vests with the State Governments vide Entry 54 as well as Entry 8 of List II of the Constitution of India. Therefore, any alcohol for human consumption will not attract GST and will continue to attract the State levies.
Important recommendations of the 53rd GST Council Meeting held on June 22, 2024:
The GST Council, in its 52nd meeting, had recommended to amend GST Law to explicitly exclude ENA from the scope of GST when supplied for manufacturing alcoholic liquors for human consumption. The GST Council recommended amendment in sub-section (1) of Section 9 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) for not levying GST on ENA used for the manufacture of alcoholic liquor for human consumption.
Effective Changes proposed in the Union Budget, 2024:
Clause 110 of the Finance (No.2) Bill, 2024 proposed amendment in sub-section (1) of Section 9 of the CGST Act, so as to not to levy a central tax on un-denatured ENA or rectified spirit used for the manufacture of alcoholic liquor for human consumption.
The similar amendments were made under the IGST, UTGST, and GST (Compensation to States) Act, 2017.
Excluded ENA made effective from November 01, 2024:
Now, through Notification No. 17/2024–Central Tax dated September 27, 2024, the Ministry of Finance announces the commencement dates for various provisions of the Finance (No. 2) Act, 2024. The provisions of Section 114 of the Finance (No. 2) Act, 2024 dated August 16, 2024 w.e.f. November 01, 2024 will take effect from the date of the notification’s publication in the Official Gazette.
Relevant Sections:
“Levy and collection.
9. (1) Subject to the provisions of sub-section (2), 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 and un-denatured extra neutral alcohol or rectified spirit used for manufacture of alcoholic liquor, for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.
(2) The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.”
Meaning thereby:
Exemptions:
- CGST does not apply to:
- Alcoholic liquor for human consumption.
- Un-denatured ENA or Rectified Spirit when used for manufacturing alcoholic liquor intended for human consumption.
- This means that transactions involving these items are out of ambit of GST, recognizing their unique regulatory framework.
Our Comments:
Until now, only “alcoholic liquor for human consumption” was excluded from the scope of tax levy and collection. However, from November 01, 2024, it will also include “Un-denatured ENA or Rectified Spirit when used for manufacturing alcoholic liquor intended for human consumption” and not be subject to GST. Further, it is pertinent to note that States are expected to make necessary amendments to their respective State GST legislations.
This amendment in the law is poised to provide significant relief to all stakeholders in the alcoholic beverage industry by eliminating confusion, enhancing stability in the cost and tax framework, and alleviating the burdens associated with this heavily taxed sector.
Effect of changes prior to November 01, 2024:
Now, taking out key input in distilling alcoholic beverages out of GST and giving the discretion to levy tax to States has given more comfort to the industry. In case of levy by States, VAT on inputs such as ENA will be set off on output supplies of alcoholic beverages. For instance, it has been reported that Andhra Pradesh subjects ENA to AP-VAT. As a result, the industry may continue to navigate the complexities of taxation in one form or another.
Impact on the Cosmetics & Pharmaceuticals Industry:
While ENA remains a vital input for the alcoholic beverages sector, it is also widely utilized in the cosmetics industry for the production of perfumes and in the pharmaceutical industry for the manufacture of cough syrups. However, with effect from November 1, 2024, ENA has been brought outside the purview of GST, thereby rendering the availment of ITC inapplicable for stocks already procured by these industries.
Effect of changes post November 01, 2024:
Notably, the legal precedents established under the previous regime and the recent amendments under the GST framework warrant careful consideration. Now, the liquor industry will continue to levy VAT/CST on inputs such as ENA, which can be offset against the output supply of alcoholic beverages. In contrast, industries such as pharmaceuticals and cosmetics are precluded from claiming ITC on ENA, as it has been classified as non-taxable. This recent amendment serves as a positive development for the liquor industry and could potentially aid in resolving ongoing litigation and proceedings.
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