GST IMPACT ON LIQUOR INDUSTRY

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GST IMPACT ON LIQUOR INDUSTRY

				By: Dr. Sanjiv Agarwal
				July 15, 2017
All Articles by: Dr. Sanjiv Agarwal View Profile

Contents

It is a fact that GST which has been introduced in India w.e.f. 01.07.2017 has kept out all forms of alcoholic beverages (e.g. beer, whiskey or wine) out of its ambit and as such anybody would believe that GST will not impact alco-beverages and that alco-beverages may enjoy neutrality so far as taxes are concerned. Simply put, taxes on liquor are going to be same in GST era, as they are at present. But business may not be the same as it is done today as GST would bring in certain compelling changes for alco-beverages industry, impacting the costs and eventually the prices.

Legally speaking, alcoholic beverages meant for human consumption are out of the scope of Goods and Services Tax (GST) net and anybody who knows this would understand that there can not be any new impact, whatsoever, on alco-beverages in GST regime. However, this may not actually happen. Let's look at how and why this may not hold good.

It may be noted that there is no GST on alcoholic liquor for human consumption but supply of these goods would be subject to existing State levies. Ethyl alcohol and other spirits, denatured, of any strength shall be liable to GST at the rate of 18 percent.

Being out of GST net means a lot to this industry in terms of economies. It is a double whammy for liquor business - one, most of the input costs goes up and two, you don't get any set off of the taxes that go into the production of liquor implying that there is going to be huge cascading effect which will eventually be passed on to the consumers and these are the consumers who for want of booze. Can go that extra mile and pay extra for it. After all, habits die hard.

Let's see how costs will go up. We know that almost all goods and services shall be subject to levy of Goods and Services Tax. It is only a matter of time now. That would imply that input cost of goods (raw materials and other inputs) and services which go into the manufacture of liquor may go up and become part of the cost.

This shall invariably happen as taxes would form part of cost. The only exception could be grain spirit and grapes on which GST may not apply. However, another major input, molasses has been placed in highest tax bracket of 28 percent. All other inputs like chemicals, colouring agents and other consumables will also suffer GST of 5-18 percent.

Coming to services, almost all services, right from taking approvals and licenses from the Government to distribution in market would be liable to levy of GST. For example, if you have taken a distillery on lease, that lease will suffer GST. If you produce on job work basis, that job work would be subject to tax. Even assignment of 'brand' by the brand owner on temporary basis for production would be liable to levy of GST. Then costs of production, marketing, distribution, advertisements, cargo handling, packaging, warehousing, transportation, marketing incentives etc. would be liable to levy of GST. Infact, all expenses other than salary cost will be liable to GST. Given the fact that most of services will now be taxed at standard rate of 18 percent, there will be a flat hike in tax rate by 3 percent across the board.

The only respite could be some planning by way of review of business arrangements so that some activities may fall in the scope of services on which GST is levied as on services on which some input tax credit could be availed. Also, liquor manufacturers could renegotiate with suppliers for a lower rate because of GST benefits accruing to them. Since alco-beverages will be out of GST net, the harsh provisions of GST compliance rating and anti-profiteering may not be applicable to this industry.

Though GST is not applicable on alcoholic beverages, i.e. on manufacture there of or sale / supply of alco-beverages but these activities for or on such goods would be subject to levy of state excise duties and Value Added Tax (VAT) when sold. Thus, the industry would be subject to same taxation as was applicable prior to July 1, 2017.

While this segment of economy continues to reel under existing taxes, they would also be subject to levy of GST on:

All inputs which are covered under levy of GST,
Input services which go into rendering of supply of goods or services in relation to alco-beverages, and
Certain fees payable for licenses and permits to State Government or local bodies which do not form part of taxes on which tax would be payable.

The alco-beverage supplies are effected through licensed shops, bars, permit rooms, restaurants, hotels etc in one or the other form. So far as 'only sale' of liquor or alco-beverages are concerned (say, from shops), the taxation is simple, no GST at all but VAT on full supply value. However, where liquor is served at a place such as bar, restaurant, hotel etc. along with other food and beverages, the taxability may become complex and this may create new areas of dispute between tax authorities and tax payers. For example, a hotel may offer a buffet dinner which includes food and complimentary beer / hard drink / aerated drinks for a common price of ₹ 2500 per person. The issue would be that how to tax the amount of 2500/-, i.e., whether GST is payable on entire 2500/- @ 18 percent (the rate which is applicable to restaurants / hotels) or it should be split between food, drinks and alco-beverages and taxed separately for GST and VAT. This may not be practical. Alternatively, should it be considered as a composite supply only and entire amount be charged to one tax, i.e., GST or VAT. Yet another alternative could be to split the price between alcoholic beverages and food + non-alcoholic drinks.

To add further to the problem, let it be known that aerated drinks are taxed at 28 percent + 15 percent cess under GST regime. Even where no alcoholic drinks are involved, there may be a confusion as there are different tax rates for food / drinks (18%) and aerated water / drinks (@28% + cess). One would have to decide whether such supplies are mixed supplies (artificially bundled) or composite supplies (naturally bundled).

Sale of liquor from mini bar in a hotel room would be considered as a pure sale and may not be subject to GST but State VAT only.

It would be desirable to conceive bundling of products where tax confusions are best avoided. Also, whenever there is a doubt on taxability or rate of tax, bills or invoices may be better split and tax charged accordingly.

The slogan of 'one market one tax' does not apply to alco-beverages as this sector will continue to live with many taxes (VAT, State Excise and of Course GST on various inputs, input services and capital goods) and have prohibition of 'one market' (as each State will have its own tax laws so far as liquor is concerned). Though one can argue that demand for potable liquor to large extent is income in elastic, yet it will face the rigors of goods and services tax as well as normal inflation trends. One should not forget that the industry is now a day's also facing the increasing challenge of social agitation. All said and done, it is also a proven fact that for those who enjoy drinking, money does not matter. Somehow you manage ......and so this challenge be.

By: Dr. Sanjiv Agarwal - July 15, 2017

Discussions to this article

Sir,

An eye-opener article. In-depth study. Hidden elements unearthed.