REDUCED TAXATION ON ENA AND MOLASSES TO BENEFIT ALCO BEVERAGE SECTOR

[Dr. Sanjiv Agarwal]

Much awaited call on GST on Extra Neutral Alcohol (ENA) and molasses has been taken by the GST Council, the highest empowered federal body in the country to take decisions on anything concerning GST in the country. In India, alco beverages, can be taxed only by states and not by Union of India. Both, molasses and ENA are inputs for alco-beverage industry and are subject to levy of GST, though final output of alco-beverage is not subject to levy of GST but attracts state taxes. This hardship has been voiced time and again by industry since last six years as it distorts the input credit mechanism. Atlast, there is a hope that in near future, there is going to be a substantial relief to industry in terms of cost.

The Council in its recent meeting held on 7^th October, 2023 at New Delhi presided by Union Finance Minister has recommended to keep Extra Neutral Alcohol (known as ENA) out of GST ambit. ENA is one of the major input or raw material used to manufacture alcoholic liquor meant for human consumption, which is not subject to levy of GST.

It is understood that in India Made Foreign Liquor (IMFL), about 43%  is ENA content while for India Made Indian Liquor (IMIL), it is about 35% of ENA, thus, ENA being a major raw material.

The Council also recommended to reduce GST on molasses from 28% at present to 5% as a major relief to alco beverage sector as well as to cane farmers for faster clearance of dues and to reduce cost of producing cattle feed.

This recommendation will require suitable amendment in GST laws to exclude ENA for use in manufacture of alcoholic liquors meant for human consumption from the GST net. It may be noted that such exclusion shall not apply to any other use of ENA, i.e., industrial use. For this purpose a separate tariff HSN code has been created at 8 digit level in the Customs Tariff Act to cover rectified spirit for industrial use. The GST rate notification will also be amended to create an entry for ENA for industrial use attracting 18% GST.

GST Council’s Decisions No GST on ENA used for production of alcoholic liquor for human consumption Levy of GST @ 18% (9% CGST, 9% SGST) on ENA used for industrial use GST on molasses reduced from 28% to  just 5%, which is also used by alcoholic liquor.

Legally, post July, 2017 when GST was levied in India, States have lost the power to levy tax on ENA and now it will be left to states to levy tax, if any, on ENA. This will however, apply only to ENA being used for alcoholic liquor for human consumption. ENA, when put to industrial use will attract 18% GST. So far as tax on ENA is concerned, infact Union has ceded its right to states to tax ENA and decided not to exercise to tax the same. As a consequence, states may start levying tax value added tax (VAT) on ENA which may be uniform or vary from state to state. It will be clear in due course.

Allahabad High Court in a bunch of petitions had held that the State Government does not have legislative competence to impose UPVAT on Extra Neutral Alcohol (ENA). As many as 9 petitions were filed seeking relief in the nature of a declaration that the State legislature (of Uttar Pradesh) lost its legislative competence to impose or levy tax on the sale of Extra Neutral Alcohol, after enactment of the 101st Constitution Amendment, with effect from 01.07.2017 (GST), as a direct consequence of the enactment of Article 246A read with Article 366 (12-A) of the Constitution of India, read with the substituted Entry 54 of List II of the Seventh Schedule, to the Constitution of India. The Allahabad High Court directed the refund of Uttar Pradesh Value Added Tax (UPVAT) on Extra Neutral Alcohol (ENA) as the State lost its legislative competence to impose the tax as a result, upon the enactment of the 101st Constitution Amendment.

Consequently, and upon considering Section 174(1)(i) of UPGST Act, 2017, the impugned Notification dated 17.12.2019, insofar as it seeks to impose UPVAT on ENA, Rectified Spirit and SDS, was held to be ultra vires, both on account of lack of legislative competence and valid delegation. The court directed issuance of refund of tax so collected. Prior to the 101st Constitution amendment and, in light of Article 246 of the Constitution read with Entry 54 of List II (as those provisions then existed), the State legislature had the legislative competence to enact laws to impose a tax on sale or purchase of any goods other than newspapers, subject, however, to the provisions of Entry 92A of List I. Also, in view of Article 246 of the Constitution read with Entry 51 of List II of the Seventh Schedule, the State Government had the legislative competence to enact laws to impose duties of excise on goods manufactured or produced in the State, being alcoholic liquors for human consumption and opium, Indian hemp, etc.

This decision of GST Council is likely to be a major relief for all stakeholders in the alco-beverage industry as it clears all confusions, provides stability to cost and tax framework and will be a booster to otherwise heavily taxed sector.

While industry may rejoice for the time being, it may be prudent to watch for how states look at this offer of Union which may throw open more litigation and confusion. If there is no legislative competence, such ceding of power will also not suffice. The silver lining is that if this happens, players would also be entitled to input tax credit as both would then suffer VAT which will be subject to input tax credit.

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