ITC ON SUPPLY OF ALCOHOLIC LIQUOR TO BE REVERSED

[Dr. Sanjiv Agarwal]

In one of the recent advance rulings pronounced by Authority for Advance Ruling (AAR), West Bengal, viz, IN RE: M/S. KARNANI FNB SPECIALITIES LLP - 2023 (2) TMI 872 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL, the taxability or otherwise of supply of alcoholic beverages for human consumption and input tax credit along with reversal of input tax credit on common inputs was examined and a clarity provided on the same.

The applicant provides restaurant services from its lounge bar including banquet renting, catering and selling / serving alcoholic beverages for human consumption to its customers. It sought an advance ruling on issues relating to Union of India taxing the supply of alcoholic liquor for human consumption under GST laws, nature of supply of alcoholic liquor as exempt or non-taxable supply and need for reversal of input tax credit (ITC) on such supplies.

It is a fact that tax is levied on supply of restaurant services, catering services and banquet renting as these are not supply of alcoholic beverages for human consumption. The main issue relate as to whether the applicant is required to undertake reversal of ITC in terms of rule 42 to the extent of turnover that relates to sale of alcoholic liquor for human consumption. It relates to apportionment of input tax credit under GST law [Section 17(2), Rule 42].

The Authority examined the scope of ‘goods’ as well as ‘supply’ in the context of GST. As per section 2(52), 'goods' means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. The said definition thus excludes only money and securities meaning thereby only money and securities cannot be treated as goods under the GST Act. In absence of any such exclusion for alcoholic liquor for human consumption, which is undisputedly a movable property, thus qualifies as goods under the GST Act.

'Supply' is defined in section 7 to include all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business. The expression 'supply' thus includes sale of goods. Sale of goods namely alcoholic liquor for human consumption for a consideration by the applicant in the course or furtherance of business, thus, comes under the purview of supply as defined in section 7 of the GST Act.

It held that the activities of selling of alcoholic liquor for human consumption by the applicant qualifies as supply under the GST Act. Further, Article 366(12A) of the Constitution as amended by 101st Constitutional Amendment Act, 2016 defines the Goods and Services Tax (GST) as a 'tax on supply of goods or services or both, except taxes on the supply of alcoholic liquor for human consumption'. It, therefore, stands to reason that the taxable event under the GST Act is supply i.e., goods and services tax is a tax which is levied on supply of goods or services or both. The specific exclusion delineates that tax shall not be levied on supply of alcoholic liquor for human consumption. Accordingly, section 9 of the GST Act which deals with 'Levy and collection' excludes levy of tax on the 'supply of alcoholic liquor for human consumption'.

Therefore, sale of alcoholic liquor for human consumption is a supply under the GST Act on which tax is not leviable. A supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act is defined as 'Non-taxable supply' in section 2(78) of the CGST Act. Thus, sale of alcoholic liquor for human consumption shall be treated as non-taxable supply, as discussed. Further, 'exempt supply' as defined in section 2(47) of the CGST Act includes non-taxable supply. A conjoint reading of section 2(47) and 2(78) thus denotes clearly that the aforesaid supply would also be treated as 'exempt supply'.

For the purpose of input tax credit, section 17(2) and Rule 42 allows a registered person to utilize input tax credit to the extent of input tax paid on inputs and input services that are used for making taxable supplies including zero-rated supply. Credit of input tax attributable to 'exempt supplies' is to be reversed as per the prescribed formula. Since the activities of selling of alcoholic liquor for human consumption by the applicant would be treated as 'non-taxable supply' and therefore falls under the category of 'exempt supply'.

It was thus, ruled that as sale of alcoholic liquor for human consumption falls under category of exempt supply, input tax credit attributable to such exempt supply is required to be reversed in terms of formula prescribed in rule 42 of CGST Rules. Also, reversal of ITC would not mean discharging of GST liability on output supply of alcoholic liquor for human consumption as under GST input tax and output tax are different and distinct from each other.

The statutory scheme, as envisaged under the GST law requires reversal of tax which is charged on inward supply of goods or services or both. Input tax is totally different and distinct from outward supply. Since tax is not leviable on supply of alcoholic liquor for human consumption under the GST Act, there cannot be any inward supply to the applicant of the said item on which tax is to be charged by its supplier or the applicant is liable to pay tax under reverse charge mechanism - the reversal of tax charged on inward supplies which are altogether different from outward exempted supplies of alcoholic liquor for human consumption would no way lead to discharging of GST liability on outward supply.

It is hoped that the alco-beverages industry will take a note of the ruling and be guided accordingly.