Should Industrial Alcohol, an important intermediate input for pharmaceuticals, chemicals, paints, cosmetics among others be taxed under the Goods & Services Tax (GST) or the State Excise laws —that is the question? The Supreme Court had debated and decided this issue in 2024—a full 64 years after the issue first arose.
At the outset a bit of background. Industrial alcohol and potable (drinkable) liquor are both manufactured from rectified spirit, a highly concentrated spirit with up to 95% alcohol, and which is toxic in nature. Rectified spirit is processed and alcohol strength reduced (up to 42.5% in case of whiskey to lesser depending upon the beverage) to make it drinkable. When the rectified spirit undergoes a “denaturation” – basically making the spirit unpalatable and unfit for human consumption, it becomes industrial alcohol.
For years, the States and the Centre have contested as to who has the legislative competence over each type of alcohol. The cause of the confusion being the overlapping jurisdictions under the various lists. Entry 52 of the Union List empowers the central government to regulate industries that Parliament finds to be of “public interest.” Parliament through Section 18-G of the Industries (Development and Regulation) Act, 1951 is entrusted with the power to regulate specific products related to scheduled industries primarily to ensure these goods are sold at reasonable prices.
Under Entry 8 of the State List, a state is empowered to make all laws relating to “Intoxicating liquors- production, manufacture, possession, transport, purchase and sale of intoxicating liquors all form under the ambit of the States . However, under Entry 33 of the Concurrent List both the state and Union governments can make laws on the products of any industry, even if Parliament has granted control to the Union in public interest. And this created the confusion, with both the Union and the Staes believing they had the power to regulate industrial alcohol.
Litigation in this matter commenced as early as in 1956 when a five-judge Constitution Bench of the Supreme Court held that the parliamentary intent behind Section 18-G did not debar a State from exercising powers to legislate on matters under Entry 33 of Concurrent list. This was in a matter relating to sugarcane. 34 years later in 1989, a seven-judge Constitution Bench of the Supreme Court held that the state government had power to regulate the use of alcohol. As part of that power, it held that states can also create provisions to prevent and check industrial alcohol being misused to make potable liquor. The Uttar Pradesh government issued a notification imposing a licence fee on the quantity of specially denatured spirit obtained from distilleries.
The notification triggered a series of writ petitions at the Allahabad High Court challenging the competence of the State to issue such a notification. The High Court held that only the Union could legislate on liquor which was “unfit for human consumption”, that is, industrial alcohol— it held the fee was nothing but a tax in another name. Uttar Pradesh issued a revised notification- the fee was to be imposed on any sale of rectified spirit to a wholesale vendor , but would not apply if the rectified spirit was converted into industrial alcohol after denaturation.
This was challenged and a Division Bench of the Supreme Court delivered a judgement on a Special Leave Petition (SLP) reiterated that the state government was competent to levy a fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol. This, the Court stated, would ensure that both the State and the public are protected from consuming illicit liquor. Despite this there was once again a challenge to the notification of the Uttar Pradesh Government which travelled from the High Court to ultimately the Supreme Court which granted an interim stay on the Allahabad High Court’s order.
The matter was referred to a division bench of the Supreme Court which held that the states had the legislative competence to regulate potable liquor and only a ‘limited competence’ over industrial alcohol to make provisions to prevent and check industrial alcohol being used as intoxicating liquor. The matter was referred a nine-member bench of the Supreme Court. The matter remained pending for 4,872 days. A nine-judge Constitution Bench led by the then CJI Chandrachud commenced hearing the case in April 2024 and reserved judgement after six days of hearing. On 23 October 2024, eight out of nine judges upheld state governments’ power to regulate industrial alcohol. It held that intoxicating liquor which is under the competence of the States under Entry 8 of List II of the Seventh Schedule includes industrial alcohol. In effect industrial alcohol was to be under the purview of States opening up another source of revenue.
And here begins the strange state of fiscal jurisdiction in the country. Despite the Supreme Court’s categorical order in effect holding that industrial alcohol cannot be taxed under GST, it continues to be under GST. It is classified under the HSN code at 2207 and is being subject to a 18% GST levy. No State appears to have taken cognisance of the Supreme Court’s order including Uttar Pradesh whose notification was the trigger for the matter going up to the Supreme Court. How then should the matter be resolved going forward?
States should not rush to levy excise. That would cause enormous confusion to the industry. Hence, they should write to the Centre explaining the present legal imbroglio and request that matter be taken up in the next GST Council meeting for a swift resolution. The Council should recommend that in view of the Supreme Court order, Industrial alcohol will not be in the GST net but that the States would be free to levy excise under their laws. The States should take cognisance of the fact that the GST levy of 18% was with input tax credit; it is unlikely that they can put in place any mechanism whereby they can give credit for the taxes paid on the inputs all of which will be in the GST regime.
States would do well to take cognizance of Justice B.V. Nagarathna’s dissenting opinion where she opined that this could lead to increase in prices. Hence States should accordingly fix an excise rate which mimics the final GST rate giving a suitable set-off. States have lost what was their legitimate revenue from the date of the Supreme Court order-23 October 2024. I am not certain how this can be resolved — will the Centre consider proportionally distributing the revenue collected from industrial alcohol to the manufacturing States concerned? That will be a magnanimous call and one which will go a long way in strengthening Centre-State fiscal relations.
The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes and Customs (CBIC). The views are personal.
