Dr. Sanjiv Agarwal

During FY 2017-18, the industry witnessed highway sales bans, demonetization, GST, route-to-market changes in UP, West Bengal and Chhattisgarh. The alcoholic beverages industry in India is heavily regulated, with excise and other taxes forming an important source of revenue for state governments.

The rumors or expectations of inclusions and exclusions from Goods and Services Tax (GST) net have its toll on stock market prices of liquor manufacturing companies. And it work both ways to raise or lower the stock market prices of these companies. This was witnessed recently in stock market behavior of alco-beverages companies.

The spirits industry is heavily regulated with state-specific rules, ever increasing taxes, price control, distribution model changes and political interference. While alcohol 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. However, a type of ENA that is also used to make industrial alcohol, is under GST, which lead to such misinterpretation.

Let’s look at this – there was a GST Council, the highest decision making authority for GST, meeting on 21 July 2018, (the 28th one) with talks doing rounds that Extra Natural Alcohol (ENA) may be recommended to be brought into GST net. ENA is a highly distilled alcohol which is a major input used for production of potable alcohol meant for human consumption with 90 percent usage. An inclusion of ENA in GST would mean that profitability of all alco-beverages companies would take a hit. 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).  However, while centre is keen to impose this levy, many states are opposed to it as they feel that to tax it is their right. Currently, states levy VAT on ENA.

ENA is a derivative of sugarcane molasses and used in a number of industries, from cosmetics to alcoholic beverages. Almost 80 per cent of it is used in making potable alcohol. The rest is used by the pharma industry to manufacture cough syrups and by the cosmetics industry to make perfumes.

Presently, the major usage of ENA remains outside the ambit of GST. The levy of GST would increase the cost for the manufacturers of potable alcohol. Unless final product prices are increased, this would lead to margin pressure for potable alcohol manufacturers. However, companies have been benefitted from low sugar prices in recent time. All alco-beverages companies remains exposed to a myriad of state-specific regulations like state excise duty, price control, distribution model changes and politically expedient alcohol bans (Gujarat, Bihar etc) while higher advertising spends may not suffice for sustained premiumisation in the event of pullback.

How does it impact share prices can be understood from stock market trends. For example, the share price of United Spirits declined upto 4 percent 2-3 days before GST Council meeting on speculation that Extra Neutral Alcohol may be brought under the GST ambit which will adversely impact profitability of alco- beverages segment. Going further, the prices witnessed a decline of upto 15 percent in one month prior to July meeting of GST Council. Same could be seen for Radico Khaitan Ltd., another major player and others.

Recently, a company sought Advance Ruling on this issue but the Authority for Advance Ruling declined to issue any ruling or opinion stating that GST Council should first decide on the levy of GST on ENA. The Centre had sought the Attorney General’s view on the matter, who gave a go-ahead, saying it was not fit for human consumption. So bringing it under GST would not require a Constitutional amendment.

It is pertinent to know that while liquor is not under the ambit of GST, it was expected that the government may include ENA, the main input of alcohol for human consumption. There has been no decision made on the inclusion of ENA in GST and issue remains pending, which has cleared the near-term overhang on the IMFL stocks. Post GST Council meeting on 21 July, 2018, since GST Council refrained from taking any decision on levy of GST on Extra Natural Alcohol, there was a reverse trend witnessed on stock market with all major liquor stocks rising again. The prices went up by 2-4 present for United Spirits, Radico Khaitan and others.

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