WHAT DOES IT MEAN FOR LIQUOR TO BE OUT OF GST

[Dr. Sanjiv Agarwal]

It is a fact that alco-beverage companies shall be out of Goods and Services Tax (GST) net as per Constitution of India since GST can not be levied on alcoholic beverages meant for human consumption (potable liquor). It would continue to be a State subject on which taxes would be levied only by the State Governments implying that their production will not be subject to GST and will continue to be taxed with State Excise Duty and Value Added Tax (VAT).

Alco beverages: What's in store Out of GST But will suffer State excise on production VAT on Sales Exposed to both tax regimes (existing and GST) Various inputs and services would be subject to GST Will affect costs Will affect bottom-line Not a tax efficient scenario

What can Alco-beverages Sector do

Being out of GST net, alco-beverages sector will be adversely impacted in two ways:

1. Their cost of inputs / raw materials, consumables as well as services which are consumed in the course of production of alcoholic beverages will add to the cost of production and it will thus increase the cost. It will be a cost to company, unlike other goods.
2. Whatever taxes they pay on inputs or input services will not be allowed to be set off from the tax on finished goods which they produce tax. Cascading of tax would add to cost, squeeze working capital and the finished product (liquor) will have a higher selling price or profit margins will shrink.  This may also impact sales to some extent.

In effect they would be exposed to both tax regimes without any tangible advantage. They will be made liable to comply with GST law, wherever it is applicable as recipient of service or buyer of goods.

How alco-beverages would be treated in GST regime All inputs which go into production –liable to GST Agricultural inputs – exempt Services consumed – generally liable to GST Inter unit supplies – not taxable Sale of alco0beverge – liable to VAT Output services : Renting of immovable property leasing of distillery-  liable to GST Assignment of brands – liable to GST Other Services (e.g. selling & distribution) - liable to GST

Being out of GST

Being out of GST net means a lot to this industry in terms of economies. It is a double whammy for liquor business - one, most of the input costs goes up and two, you don't get any set off of the taxes that go into the production of liquor implying that there is going to be huge cascading effect which will eventually be passed on to the consumers and these are the consumers who for want of booze. Can go that extra mile and pay extra for it. After all, habits die hard.

Let's see how costs will go up. We know that almost all goods and services shall be subject to levy of Goods and Services Tax. It is only a matter of time now. That would imply that input cost of goods (raw materials and other inputs) and services which go into the manufacture of liquor may go up and become part of the cost.

This shall invariably happen as taxes would form part of cost. The only exception could be grain spirit and grapes on which GST may not apply. However, another major input, molasses has been placed in highest tax bracket of 28 percent. All other inputs like chemicals, colouring agents and other consumables will also suffer GST of 5-18 percent.

Coming to services, almost all services, right from taking approvals and licenses from the Government to distribution in market would be liable to levy of GST. For example, if you have taken a distillery on lease, that lease will suffer GST. If you produce on job work basis, that job work would be subject to tax. Even assignment of 'brand' by the brand owner on temporary basis for production would be liable to levy of GST. Then costs of production, marketing, distribution, advertisements, cargo handling, packaging, warehousing, transportation, marketing incentives etc. would be liable to levy of GST. Infact, all expenses other than salary cost will be liable to GST. Given the fact that most of services will now be taxed at standard rate of 18 percent, there will be a flat hike in tax rate by 3 percent across the board.

The only respite could be some planning by way of review of business arrangements so that some activities may fall in the scope of services on which GST is levied as on services on which some input tax credit could be availed. Also, liquor manufacturers could renegotiate with suppliers for a lower rate because of GST benefits accruing to them. Since alco-beverages will be out of GST net, the harsh provisions of GST compliance rating and anti-profiteering may not be applicable to this industry.

Way forward

Subject to liquidity, working capital availability, capacities and strategic decisions based on various other commercial and economic decisions, alco beverage sector can look for integration, both backward and forward by eliminating third party suppliers and services providers. This may reduce the cost as well as mitigate tax cascading. Moreover, profits margins could be retained internally. Packaging, packing material, caps, clearing and forwarding, transportation etc, could be some areas to buy this idea.