DISRUPTIONS UNDER GST ON ALCOHOLIC BEVERAGES

[Dr. Sanjiv Agarwal]

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

Constitutional Provisions

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 the 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.”

GST Impact on Incomes / Expenses

If one looks at the income side of any alco-beverage company, it can be observed that following income heads would be subject to levy of GST or otherwise.

GST levied	State excise / VAT levied
Sale of pet bottles and caps Sale of printed bottles Sale of blends Income through other distilleries / bottling units Sale of scrap Brand franchise income Commission on sales Other miscellaneous  incomes (including consultancy fees, IPR revenue etc)	Sale of country liquor Sale of IMFL Sale of imported liquor

Non-taxable Incomes

There would be certain incomes which would not be exigible to any tax i.e., GST or State excise /VAT such as :

• Export incentives, if any
• Tax refunds / incentives
• Sale of assets
• Interest income
• Dividend
• Write offs etc

Expenses that will suffer GST

If one looks at expense side of any alco-beverage company, the situation is more worse – you end up paying tax (GST) on almost every expenditure head despite the fact that this sector is out of GST net. This exclusion is only for output tax. Tax on all inputs or input services is not excluded or exempt.

To illustrate, GST would be payable on the following heads of expenses  /overheads:

• Borrowing costs other than interest on loans
• All stores and spares consumed
• Repairs & maintenance
• Hire charges
• Legal expenses
• Manpower recruitment expenses
• Security agency charges
• Insurance
• Royalties payable
• Rent
• Traveling expenses
• Director's fees
• Professional & legal fees
• Communication expenses
• Freight Charges
• Advertisements & sales promotion
• Marketing & distribution expenses

The only expense heads which may be out of GST net are salary and wages, interest expense, taxes, reimbursements (incurred as pure agent) and depreciation. Even the expenses incurred from unregistered dealers would be taxed under reverse charge method.

In GST regime, there is provision that if a registered person receives any supply of goods or services from an unregistered person, than GST on such supplies shall be discharged by the registered recipient [section 9(4) of CGST Act, 2017]. It would therefore, be necessary for alco-beverages companies to ensure that they deal, to be extent possible, with registered suppliers only to avoid payment and related compliance in relation to discharge of tax under reverse charge. This would imply that all companies would have to pay tax under forward charge or under reverse charge on goods or services subject to GST. This can not be avoided.

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, 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.

Taxability and Valuation of used bottles

An example of adverse GST impact would be on the exclusive patented bottles which alco-beverage manufacturers generally use five to seven times. Presently, many States impose a lower VAT (Value-added tax) rate or a standard VAT rate on glass bottles subject to input credit as compared to the VAT imposed on the finished products sold within the State i.e., the used glass bottles which are purchased by brewers/spirits manufacturers from used bottle dealers are again taxed at the lower/standard VAT.

This taxation arrangement with regard to the recycling of glass bottles may undergo a change post-GST implementation, as each re-use/re-supply is likely to a suffer GST @ 12% or 18% (rate not yet fixed, assumed) with no possibility of tax credit for recycled glass bottles as alcohol is excluded from the GST regime. Consequently, 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 the first purchase by the brewery or manufacturer from the bottle manufacturer.

As per Rule 32(5)  of the CGST Rules, 2017, where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

The Central Government vide Press Release 15^th July, 2017 has clarified the taxability of used or second hand bottles. Rule 32(5) of the Central Goods and Services Tax Rules, 2017 provides that where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored. This is known as the margin scheme.

Further, Notification No.10/2017-Central Tax (Rate), dated 28.06.2017 exempts central tax leviable on intra-State supplies of second hand goods received by a registered person, dealing in buying and selling of second hand goods [who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5)] from any supplier, who is not registered. This has been done to avoid double taxation on the outward supplies made by such registered person, since such person operating under the margin scheme cannot avail input tax credit on the purchase of second hand goods.

Thus, margin scheme can be availed of by any registered person dealing in buying and selling of second hand goods [including old and used empty bottles] and who satisfies the conditions as laid down in rule 32(5) of the Central Goods and Services Tax Rules, 2017.

End note

To conclude, it can be said that it is hard to believe that alco-beverages segment is out of GST net. It is very much there as a victim of political decision which will negatively impact this industry. One can only hope that wise sense would eventually prevail and  this sector may be brought under the GST ambit, sooner the better.