GST CONCERNS FOR LIQUOR INDUSTRY

[Dr. Sanjiv Agarwal]

Liquor companies have now come out of demonetization, highway sales ban and Goods and Services Tax (GST) hangover and can be said to be in high spirits, if the numbers are to be believed. Infact 2018 so far has seen revival of demand of Indian Made Foreign Liquor (IMFL) by 2-3 percent, which was in negative for last two years. The slow down during 2016-2018 was mainly due to adverse effect of demonetization in November, 2016 followed by highway sale ban by Supreme Court in March, 2017 and then GST w.e.f. 1^st July, 2017. The impact of all these one after the other reasons have largely stabilized and business can be said to be near normal now.

On whether to include a alcoholic beverages and alcohol into GST ambit is still a big question mark. The GST Council, the supreme body to take decisions on GST under the Constitution, is expected to take first steps in this direction but that will happen only when all the states are on board. With opposition (political parties other than the ruling party at centre) still governing few States / Union Territories, consensus may not be possible as has been the decisions of the Council so far. Though there is resistance from some states, atleast Extra Neutral Alcohol (ENA) which is a key raw material or ingredient in producing alcoholic beverages may be first one to be introduced in GST club. ENA is a derivative of molasses and 80 per cent of it goes into manufacturing liquor. The rest is used by the pharmaceutical industry to manufacture cough syrups and the cosmetics industry to make perfumes.

It may be noted that industrial alcohol is already under the GST net. If this happens, alco-beverages sector will enter another complex situation, viz, ENA being subjected to GST whereas output, i.e., alco-beverages being out of GST net, leading to enhanced cost of production without any set off benefit of input taxes in the form of GST.

It may be technically correct to levy GST on ENA as it is not a potable liquor (meant for human consumption), yet it will bring in more distortions but of course, more revenue too to the exchequer. However, the VAT paid on the purchase of ENA can be used as a set-off on the VAT payable on sale of potable alcohol. But, if ENA is subject to the GST, input tax credit will no longer be available. While ENA is a major input for alco-beverage sector, it is also used in cosmetic, pharmaceutical and perfume formulations. There it would be allowed a set off and will therefore, be a welcome change.

GST or no GST, be it on raw material and inputs or the output supply, alco-beverage sector is facing challenge on costing front which accrues because of GST. The only possible solution lies in two fold strategy -one, to remove GST on all major inputs and two, bring both inputs and output under GST ambit. The second option may work but if all the states agree to it. There is a big ‘if’ to be demolished. Let’s see what is in store as this has political ramifications too.