TAX ON EXTRA NEUTRAL ALCOHOL (ENA)

[Dr. Sanjiv Agarwal]

Though much awaited call on GST on exclusion of Extra Neutral Alcohol (ENA) and molasses from GST was taken by the GST Council in its 52^nd meeting held on 7 October, 2023, the highest empowered federal body in the country to take decisions on anything concerning GST in the country, it got a pace only in 53^rd meeting held on 22 June, 2024, resulting now in legislative amendment in Finance Bill, 2024 (Budget 2024-25).

In India, alco beverages, can be taxed only by states and not by Union of India. ENA is a   input for alco-beverage industry and is subject to levy of GST, though final output of alco-beverage is not subject to levy of GST but attracts state taxes. This hardship is being voiced time and again by industry since last seven years as it totally distorts the input credit mechanism. There is now a hope that in near future, there is going to be a substantial relief to industry in terms of cost.

Legally, post July, 2017 when GST was levied in India, States 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. 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.

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 in its 52^nd 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. Since no meeting took place in last eight months, GST Council in its 53^rd meeting held on 22.06.2024 recommended to amend section 9(1) of the CGST law (and of course state GST laws). The press release of 53^rd Council meeting reads as under:

“Applicability of Goods and Services Tax on Extra Neutral Alcohol (ENA) Taxation of ENA under GST: The GST Council, in its 52nd meeting, had recommended to amend GST Law to explicitly exclude rectified spirit/Extra Neutral Alcohol (ENA) from the scope of GST when supplied for manufacturing alcoholic liquors for human consumption.  The GST Council now recommended amendment in sub-section (1) of Section 9 of the CGST Act, 2017 for not levying GST on Extra Neutral Alcohol used for manufacture of alcoholic liquor for human consumption.”

Section 9 of CGST Act, 2017 deals with levy and collection of tax. According to section 9(1), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

Now as per Council’s recommendation, the exception shall include supply of ENA to manufacturers of alcoholic liquor meant for human consumption.  The exact language of the amended provision shall be known once the Finance Bill is presented in the Parliament on 23^rd July, 2024.

This recommendation requires 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.

53rd GST Council’s meeting Decisions No GST on rectified spirit / ENA used for production of alcoholic liquor for human consumption. Amendment in Section 9(1) of CGST Act, 2017.

GST law has been amended in the recent Union Budget (The Finance Bill, 2024) laid in Parliament on 23.07.2024. Section 9(1) of CGST Act, 2017 has been amended. Extra Neutral Alcohol which is used in manufacture of liquor is proposed to be kept out of the purview of GST. Accordingly, there will be no levy of GST on un-denatured extra neutral alcohol or rectified sprit used for manufacture of alcoholic liquor for human consumption. Hitherto, only ‘alcoholic liquor for human consumption’ was excluded from scope of levy and collection of tax. Similarly, there will also be no levy of IGST and UTGST. Further, States shall also incorporate necessary changes in the respective State GST legislations.

This amendment in law 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 major relief to otherwise heavily taxed sector. However, states will now move towards levy of VAT on ENA. It is learnt that state like Andhra Pradesh subjects ENA to AP-VAT. The industry may continue to face the taxing sword in one form or the other.