The ambiguity surrounding the taxability of spirits like rectified spirit (RS) and extra neutral alcohol (ENA) has been an Achilles heel for the spirit manufacturing industry. These non-denatured spirits are predominantly used as raw materials for producing alcoholic liquor for human consumption. Generally, these spirits are in concentrated form with high alcohol content and cannot be consumed as such without further processing.
The power to tax the manufacture and sale of alcoholic liquor for human consumption is exclusively vested with the State Legislature (see Entry 51 and 54 of List II of the Constitution of India).
The Constitution defines the goods and services tax (GST) as any tax on the supply of goods, services, or both – except taxes on the supply of the alcoholic liquor for human consumption (see Article 366 (12A) of the Constitution of India).
Thus, GST is not leviable on the supply of alcoholic liquor for human consumption (see Section 9 of CGST Act, 2017, and Section 5 of the IGST Act, 2017).
On the issue relating to the taxability of RS and ENA, several contrary clarifications have been issued by various state departments. These clarifications have only added more fuel to the fire and have rendered the issue as clear as mud. While some believe these spirits should attract GST; others are of the view that the spirits are liable to tax by the respective state governments as alcoholic liquor for human consumption.
The key question is whether the phrase ‘alcoholic liquor for human consumption’ includes only those alcoholic mixtures which are fit for human consumption as they are, or whether it also includes mixtures that are ultimately used for producing liquor for human consumption.
In the pre-GST regime, the Apex Court had many an occasion to deliberate upon whether the state has the power to levy tax on industrial alcohol if it has the potential to be used for manufacturing potable liquor. A summary of the jurisprudence on this subject is below.
Synthetics and Chemicals Ltd vs. State of U.P. [(1990) 1 SCC 109]
Alcoholic liquors must be understood as they are and not what they can become. Therefore, industrial alcohols such as ethyl alcohol, which cannot be consumed as such but can be used as inputs for manufacturing intoxicating liquor after processing and substantial dilution, will not qualify as alcoholic liquor for human consumption. Therefore, the state does not have the authority to levy duty or tax on industrial alcohol that is not fit for human consumption. Such tax can be levied only by the central government.
State of U.P. v. Modi Distillery [(1995) 5 SCC 753]
The state can only levy excise duty on alcoholic liquor that is fit for human consumption when its manufacture is complete, and not on the raw material or input that is still in process of being rendered fit for consumption.
This ruling relied on Synthetics and Chemicals Ltd.
Bihar Distillery v. Union of India [(1997) 2 SCC 727]
This judgment differed from the decision of Synthetics and Chemicals Ltd., stating that this judgment did not consider spirits that can simply be diluted to render them fit for human consumption.
The Court ruled that the Synthetics and Chemicals Ltd. judgment only dealt with alcohol that could be used for industrial purposes. Regarding RS, which could be used for producing alcohol fit for human consumption through dilution, it was held that the power to levy excise duty would continue to rest with the state governments.
This ruling thereby equated such spirits with alcohol fit for human consumption.
Deccan Sugar and Abkari Co. Ltd. v. Commissioner of Excise [(1998) 3 SCC 272]
This judgment doubted the proposition held in the Bihar Distillery Case. The Court referred the matter to a Larger Bench.
Deccan Sugar and Abkari Co. Ltd. v. Commissioner of Excise, A.P [(2004) 1 SCC 243]
The Larger Bench upheld the validity of the decision in the case of Synthetics and Chemicals Ltd. without expressly overruling the judgment of Bihar Distillery.
The Court noted that the spirit will qualify as alcohol for human consumption only if it is fit for consumption ‘as is’.
State of U.P. v. Vam Organic Chemicals Ltd. and Ors., [(2004) 1 SCC 225]
The reasoning employed in the case of Bihar Distillery was disapproved. The ruling in Synthetics and Chemicals Ltd was held to be lawful.
Recent decision in Utkal Distilleries Ltd
Continuing the above line of judgments, the Division Bench of the Supreme Court of India had another opportunity to consider the scope of the phrase ‘alcoholic liquor for human consumption’.
The opportunity came in the case State of Orissa and Ors. vs. Utkal Distilleries Ltd. [2022-VIL-18-SC]. In this case, the Apex Court was asked whether the state can levy excise duty, under the Bihar and Orissa Excise Act, 1915, on a ‘weak spirit’ that was generated as a waste during the process of purifying rectified spirit.
The purified rectified spirit was intended for use in manufacturing alcoholic liquor for human consumption. In fact, this weak spirit, or wastage, was found to be unfit for drinking after conducting various tests.
The Bihar and Orissa Excise Act, 1915 provided, among other things, for the levy of excise duty on the import, transport, and manufacture of any ‘excisable article’ (see Section 27 of the Bihar and Orissa Excise Act).
‘Excisable article’ was defined to mean any alcoholic liquor for human consumption, or any intoxicating drug (see Section 2(6) of the Bihar and Orissa Excise Act).
Therefore, it was evident that the state had the power to levy excise duty only if the weak spirit qualified as alcoholic liquor for human consumption.
The Apex Court considered the decisions of Synthetics and Chemicals Ltd. and Modi Distillery, where it was clearly held that ‘alcoholic liquor for human consumption’ would not include the raw materials or inputs which are not fit for consumption. Therefore, the Supreme Court concluded that the state was not vested with the power to levy excise duty on ‘weak spirit’.
Significance of the decision
This decision is significant as it reiterates that the judgment of Synthetics and Chemicals Ltd. is a good law. Though it relates to the former excise regime, the proposition on the scope of ‘alcoholic liquor for human consumption’ is relevant to the GST regime as well.
Applying the principles as laid down in Synthetics and Chemicals Ltd. and followed in Utkal Distilleries Ltd. and various other judgments, it can be said that spirits such as ENA and RS, which are not fit for consumption as such, cannot be brought within the scope of excise duty or value added tax (VAT) levied exclusively by the states.
These spirits, by not qualifying as alcoholic liquors for human consumption, would continue to be governed by the GST regime and both the central government and the state would have concurrent powers to levy tax.
A clear judicial intention
The extensive jurisprudence on this point is indicative of the judicial intention to ensure a clear division of the powers of the state and central government to levy taxes on spirits and alcoholic mixtures as envisaged by the Constitution of India.
While the subject was often disputed in the former taxation regime, it is unfortunate that this has continued into the GST regime as well. The issue is currently pending with the GST Council for clarification. A decision is yet to be made regarding the taxability of these spirits and, until such time, the issue hangs in the balance and confusion in the industry is writ large.
The question concerning the taxability of ENA has been the subject matter of deliberation, since the 20th GST Council Meeting. Even after a legal opinion by the Attorney General of India (see AG 16/2017 – Adv. C dated 23.12.2017) and a decision from the Allahabad High Court (see 2021-VIL-714-ALH) clarifying that ENA supplied for industrial use is liable for GST, the issue is yet to be put to rest.
Without clarity on this issue, the industry will continue to be laden with different levies on the same product across states. Such a situation defeats the very purpose of introducing GST – in other words, to ensure uniform taxation across the country.
Based on the recent Apex Court decisions, it is evident that the judicial intention is clear. Only potable liquor that is capable of human consumption in the form in which it is sold should be excluded from GST.
Therefore, companies faced with scenarios where varied taxes are being demanded on ENA and RS or other such spirits in different states may represent before the GST Council seeking clarity on this issue at the earliest instance. This is also important from the perspective of interest costs that would have to be borne without a precise clarification on the correct tax to be remitted on the sale of spirits not fit for human consumption.
One can only hope that decisions such as Utkal Distilleries Ltd result in the settlement of this dispute, sooner rather than later.
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