ALCOHOLIC BEVERAGES INDUSTRY UNDER GST REGIME

[Dr. Sanjiv Agarwal]

Introduction

Alcohol sector is the second largest contributor of taxes to state Government exchequers yielding more than ₹ 90, 000 crores in taxes every year.  The total tax impact for liquor companies are in the range from 70-150% in most states as no inter-tax set-offs are available for them. While alcoholic beverages represent 25% of the food and beverage market in China and the US, in India, spirits alone is 34%, making it the largest category. For most states, alcohol contributes to 20 to 25% of state revenue (state excise).

It may, however, be noted that manufacture of liquor meant for human consumption is subject to state excise duties and not Central Excise Duty under the Central Excise Act, 1944. State Excise Duties will not get subsumed in GST.

With Constitution (101^st) Act, 2016 which authorizes levy of GST in India, it is clear that alcohol beverages shall be kept out of GST net.  However, industry has been wanting the inclusion of all sectors and products, with limited exceptions and exemptions.

Present Tax Scenario

According to clause (f) of Section 66D (Negative List) of Finance Act , 1994,  w.e.f. 1.7.2012, services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption were in the negative list .

Finance Act, 2015 had amended the aforesaid entry (f) w.e.f. 01.06.2015 to carve out from the negative list, process amounting to manufacture or production of alcoholic liquor for human consumption. Consequently, Service Tax shall be levied on bottling/job work/contract manufacturing of potable liquor (meant for human consumption) for a consideration. Alcoholic liquor meant for industrial use or for any other purpose shall still be covered under negative list (e.g. industrial spirits etc).

Certain specified job works/production processes are exempt from Service Tax vide Entry No. 30 of exemption Notification No. 25/2012-ST. To give effect to the exclusion of processes in relation to alcoholic liquor from negative list, exemption under Notification No. 25/2012-ST was also amended w.e.f. 01.06.2015 to exclude exemption to intermediate production processes/job works in relation to alcoholic liquor meant for human consumption.

Liquor industry is also subject to levy of State VAT and other local taxes as entry tax / octroi etc.

Goods and Services Tax (GST) as a tax reform

Migrating to Goods and Services Tax (GST) is a time to revisit the taxation and remove the anomalies.

Goods and Service Tax (GST) is a destination based consumption tax which is a levy of tax on all goods and services with the objective of expanding the tax base through wide coverage of economic activities , mitigating the cascading effect  , reduction of exemptions , enable better compliances etc. thereby resulting into formation of common national market for goods and services .

Taxation in GST regime 

The Constitution of India has been amended to give effect to GST by the Constitution (101^st Amendment) Act, 2016.

In article 366, a new definition of 'goods and services tax' has been provided in clause (12A), i.e., 'goods and services tax' means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.

Entry 54 (List II) with respect to alcohol, giving exclusive powers to the States to levy tax on sale of alcohol has also been substituted by following -

"Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods."

Likely Impact of GST on  alco-beverage industry

Assessing the impact of exclusion from GST of the alcohol beverage industry, it will lead to both, positive and negative impact.

Likely positive GST impact on the alco-beverage industry

• Better and efficient logistics/distribution channels
• State taxes other than excise/VAT to be subsumed in GST. To that extent, input tax credit may be allowed.
• Relief from dual administrative control (only States to control)

Likely adverse GST impact on the alco-beverage industry

• There is no concept of centralized registration in GST regime, unlike in the present setup.
• Where input goods and services used in the petroleum and liquor industries are covered under GST and the outputs are not, there could arise complex issues surrounding double taxation, ineligibility for input tax credits, supply chain regulations, and so on.
• GST will accentuate increased cascading effect of taxes on the final retail product price because no input tax credit will be available between GST and state excise/VAT.
• No input credit will be available between any two or more State taxes and on various goods and services consumed during bottling and/or production.
• Cost of production and consumer prices would likely go up which would ultimately impact sales.
• There are likely to be inefficiencies in production and distribution supply chains as alco beverages will be out of GST net.
• No encouragement for foreign direct investment (FDI).
• GST to be paid on various services without allowance of input tax credit on those services. 
• GST will be payable on various regulatory fees (for example, licence fees to State governments).
• The alco-beverage industry’s contribution to the country’s economic growth will come down in future under the GST regime.
• The State may levy cess or sin tax on luxury/sin items such as tobacco, liquor, aerated drinks, etc.
• Existing business models (self-manufacturing, contract manufacturing, IPR, franchise, etc.) may have to be revisited. 
• Vendor/supplier management for compliances will increase as manufacturers and vendors will be exposed to both non-GST regime and GST regime for certain inputs / outputs.
• There will be adverse impact on major consumers like hotels, restaurants, pharmaceuticals, perfumes manufacturing sector etc. in the form of increased cost.

Major Challenges in GST

GST poses multifarious challenges to alco-beverages industry.  In the GST regime, due to higher GST rates tax on many input raw materials (for instance, agriculture inputs to ethanol production) as well as services, costs would go up significantly which would prove detrimental to the industry in both the short-term and the long-term. Even if all of these costs are passed down the value-chain, the additional burden may have a huge working capital impact on the industry.

Manufacturers of alcoholic beverages for human consumption procure the raw materials (Extra Neutral Alcohol (ENA)/Grain Neutral Spirit (GNS) / Concentrate of Alcoholic Beverage) either through captive manufacture or by way of purchase from third parties in India or they import it from other countries. As the finished product will be kept outside GST regime, it will not only have negative impact on the state revenues but also makes the end product expensive and thereby drive the consumers to find ways and means to resort to spurious products.

Currently, 70% abatement on freight charges is available in case of transport of goods/ passengers by rail, or by goods transportation agency, subject to the condition that CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken by the service provider under the provisions of the CENVAT Credit Rules, 2004. The model GST law does not envisage such abatement. As a result, the effective current service charge rate of 4.5% (30% x 15%) would rise to 18%-20% in GST regime. The higher rate of taxes on transportation will impose a huge cost burden, leading to increased prices for the common consumers. The transportation cost will be even higher for sectors like potable alcohol and petroleum which, because of being excluded from GST base, will be unable to avail credit for the enhanced tax paid on transportation services. The 70% abatement should be continued for taxation of these services.

Some of the alco-beverages manufacturers use their own exclusive patented bottles, which may be used 5-7 times by the same manufacturer.  Presently, many States impose a lower VAT rate with some states like imposing the standard VAT rate on glass bottles vattable against the VAT on the finished product sold within the state. The used glass bottles which are purchased by brewers / spirits manufacturers from used bottle dealers are again taxed at the lower/ standard VAT.

In GST, each re-use / re-supply is likely to suffer GST @ 18% with no possibility of credit as alcohol is excluded from GST base. The effective GST cost on every bottle will be about 70% of the purchase price of a new bottle.  This too will add to cost as levying VAT on used bottles at the full purchase price leads to double taxation, since the bottles have already been subjected to VAT at the time of first purchase by the brewery or manufacturer from the bottle manufacturer.

Discussions to this article

[CA GOPALJI AGRAWAL]

Whether serving liquor in restaurant is taxable under service category in GST.

[Dr. Sanjiv Agarwal]

Dear Sir ,

Liquor is out of the scope of GST. Hence , manufacture and supply of liquor including supply in restaurant will not be taxable as service category in GST. Present taxes will continue to be levied on liquor in GST regime.

Regards ,

CA Neha Somani