2023 (2) TMI 872 - AAR - GST

Reversal of Input Tax Credit - sale of alcoholic liquor for human consumption effected by it at its premises - Section 17(2) of the CGST Act read with Rule 42 of the Central Goods and Services Tax Rules, 2017 - HELD THAT - The sale of alcoholic liquor for human consumption is a supply under the GST Act on which tax is not leviable. A supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act is defined as Non-taxable supply in clause (78) of section 2 of the GST Act. Thus, sale of alcoholic liquor for human consumption shall be treated as non-taxable supply - Further, exempt supply as defined in clause (47) of section 2 of the GST Act includes non-taxable supply. A conjoint reading of section 2(47) and 2(78) thus denotes clearly that the aforesaid supply would also be treated as exempt supply under the GST Act. Sub-section (2) of section 17 of the GST Act read with rule 42 of the GST Rules allows a registered person to utilize input tax credit to the extent of input tax paid on inputs and input services that are used for making taxable supplies including zero-rated supply. Credit of input tax attributable to exempt supplies is to be reversed as per the prescribed formula - As it is held that the activities of selling of alcoholic liquor for human consumption by the applicant would be treated as non-taxable supply and therefore falls under the category of exempt supply under the GST Act, the applicant is required to reverse input tax credit attributable to the exempt supply under sub-section (2) of section 17 of the GST Act read with rule 42 of the GST Rules. Applicability of maxim Quando aliquid prohibetur fieri, prohibetur ex directo et per obliquum - applicant contends that reversal of input tax credit would other way mean discharging of GST liability on output supply of alcoholic liquor for human consumption - HELD THAT - The statutory scheme, as envisaged under the Act requires reversal of tax which is charged on inward supply of goods or services or both. Input tax is totally different and distinct from outward supply. Since tax is not leviable on supply of alcoholic liquor for human consumption under the GST Act, there cannot be any inward supply to the applicant of the said item on which tax is to be charged by its supplier or the applicant is liable to pay tax under reverse charge mechanism - the reversal of tax charged on inward supplies which are altogether different from outward exempted supplies of alcoholic liquor for human consumption would no way lead to discharging of GST liability on outward supply.

Summary

Issues Involved:
1. Legislative competence of Parliament to legislate on the sale of alcoholic liquor under the GST regime.
2. Applicability of the CGST Act to the sale of alcoholic liquor.
3. Definition of 'exempt supply' and 'non-taxable supply' under the CGST Act.
4. Obligation to reverse Input Tax Credit (ITC) under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules in relation to the sale of alcoholic liquor.

Issue-wise Detailed Analysis:

1. Legislative Competence of Parliament to Legislate on the Sale of Alcoholic Liquor under the GST Regime:
The applicant questioned whether the Constitution confers any power onto Parliament to legislate on the sale of alcoholic liquor for human consumption under the GST regime, considering Article 246A read with Article 366(12A). The Authority noted that Article 366(12A) defines GST as a tax on the supply of goods or services except for alcoholic liquor for human consumption, thus excluding it from GST's ambit. Consequently, the sale of alcoholic liquor remains outside the legislative competence of Parliament under GST.

2. Applicability of the CGST Act to the Sale of Alcoholic Liquor:
The applicant argued that the CGST Act cannot deal with the sale of alcoholic liquor either directly or indirectly. The Authority clarified that the CGST Act and the WBGST Act exclude the levy of tax on the supply of alcoholic liquor for human consumption. However, the sale of alcoholic liquor is still considered a 'supply' under Section 7 of the GST Act, which includes all forms of supply of goods or services for consideration in the course of business.

3. Definition of 'Exempt Supply' and 'Non-taxable Supply' under the CGST Act:
The applicant contended that the sale of alcoholic liquor should not be considered an 'exempt supply' or a 'non-taxable supply' under the CGST Act. The Authority found that 'exempt supply' under Section 2(47) includes 'non-taxable supply,' and 'non-taxable supply' under Section 2(78) refers to supplies not leviable to tax under the CGST Act. Since alcoholic liquor is not leviable to GST, it qualifies as a 'non-taxable supply,' and consequently, an 'exempt supply.'

4. Obligation to Reverse ITC under Section 17(2) of the CGST Act Read with Rule 42 of the CGST Rules:
The core issue was whether the applicant must reverse ITC under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules due to the sale of alcoholic liquor. The Authority held that Section 17(2) mandates the reversal of ITC attributable to exempt supplies. Since the sale of alcoholic liquor is an 'exempt supply,' the applicant is required to reverse ITC proportionately. The Authority rejected the applicant's argument that this would indirectly impose a tax on alcoholic liquor, clarifying that input tax credit pertains to inward supplies, which are distinct from outward exempt supplies.

Ruling:
The Authority ruled that the applicant is required to reverse ITC in terms of Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules for the sale of alcoholic liquor for human consumption.