LEVY OF GST ON EXTRA NEUTRAL ALCOHOL (ENA)

[Dr. Sanjiv Agarwal]

The year 2018 so far has seen revival of demand of Indian Made Foreign Liquor (IMFL) by 2-3 percent, which was in negative for last two years. The slow down during 2016-2018 was mainly due to adverse effect of demonetization in November, 2016 followed by highway sale ban by Supreme Court in March, 2017 and then GST w.e.f. 1^st July, 2017. The impact of all these reasons has now been stabilized and business is returning to near normal now.

On whether to include a alcoholic beverages and alcohol into GST ambit is still a big question mark. The GST Council, the supreme body to take decisions on GST under the Constitution, is expected to take first steps in this direction but that will happen only when all the states are on board. With opposition (political parties other than the ruling party at centre) still governing few States / Union Territories, consensus may not be possible as has been the decisions of the Council so far. Though there is resistance from some states, atleast Extra Neutral Alcohol (ENA) which is a key raw material or ingredient in producing alcoholic beverages may be first one to be introduced in GST club. ENA is a derivative of molasses and 80 per cent of it goes into manufacturing liquor. The rest is used by the pharmaceutical industry to manufacture cough syrups and the cosmetics industry to make perfumes.

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.

The relevant clarification reads as under:

“This is with reference to the issue raised on the captioned subject during the Video Conference held on 30.06.2018. This matter was discussed in the 20th meeting of GST Council on 05.08.17 wherein it was decided to obtain legal opinion of Attorney General of India. Attorney General of India vide reference no AGI 6/2017–Adv.C dt 03.12.18 has given following opinion on the issue:

            ‘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.

            For the reasons above, I am of the opinion that 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’

In view of the above, it is informed that GST will be applicable on the supply of ENA which is used for the manufacturing of alcoholic liquor for human consumption. Accordingly the suppliers of ENA are required to be registered under GST Act & GST is to be levied on the supply of ENA. It is further informed that as per Entry No. 25 of Schedule-III of the Notification No. 1/2017-State Tax (Rate), dated 30.06.2017 & 01/2017- Central Tax (Rate) dt. 28.06.2017 the supply of ENA is exigible to be taxed @ 18% GST.”

It may be noted that industrial alcohol is already under the GST net. 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. The second option may work but if all the states agree to it. There is a big ‘if’ to be demolished. Let’s see what is in store as this has political ramifications too. In any case, recommendation will have to be made by the GST Council but there does not seem to be any likelihood of it taken place in July, 2018 meeting of GST Council.

The impact of clarification of Himachal Government may legally not apply to other states but it would raise two wider issues – whether all State Governments will agree to this as this would mean no levy of GST on ENA and further the role and decision of GST Council would be said to have been encroached as it is the GST Council which will decide whether a particular goods or service is to be included in GST ambit. It can not be done by one or few states but will have to be decided and levied on a pan India basis. Further, if one seeks advance ruling on the same and is decided in negative, the decision of Himachal Government will be subject to matter of confusion and also subject to further judicial scrutiny.