GST Council is a forum where Centre-state partnership is seen in full force. In spirit of federalism, there is one issue that the council should decide on when it meets on Thursday: industrial alcohol.
Industrial alcohol and potable (drinkable) liquor are both made from rectified spirit, a concentrated spirit containing up to 95% alcohol. Rectified spirit is further processed, and its alcohol strength reduced - to up to 42.5% in case of whisky, and lower depending on beverage - to make it drinkable. When rectified spirit undergoes 'denaturation' - making it unfit for human consumption - it becomes industrial alcohol, a critical input for pharma, chemical and cosmetic industries.
Gol and states have long contested who has legislative competence over industrial alcohol, with confusion arising from overlapping jurisdictions under various lists of Seventh Schedule.
Entry 52 of Union List empowers Gol to regulate industries that Parliament declares to be of 'public interest'. Through Section 18-G of Industries (Development and Regulation) Act 1951, Parliament has vested Union with power to regulate specified products related to scheduled industries, primarily to ensure that such goods are sold at reasonable prices.
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Entry 8 of the state list empowers a state to make laws relating to intoxicating liquors. Production, manufacture, possession, transport, purchase and sale of intoxicating liquors fall within ambit of states.
Entry 33 of concurrent list, however, gives both state and Gol the power to make laws on products of any industry, even where Parliament has declared that Union should assume control in public interest. This overlap has created confusion, with both Gol and states believing they have power to regulate industrial alcohol. Litigation on matter dates to 1956, when a 5-judge Constitution Bench of Supreme Court held that Parliament's intent behind Section 18-G did not bar a state from exercising its powers to legislate on matters under Entry 33 of concurrent list. That case, however, related to sugarcane.
The matter travelled back and forth between top court, Allahabad High Court and UP government before reaching a 9-member Constitution Bench in 2024. The court upheld states' power to regulate industrial alcohol by a 9-8 majority. It held that 'intoxicating liquor', over which states have competence under Entry 8 of List 2 of 7th Schedule, includes industrial alcohol.
In effect, this could have opened another source of revenue for states. Yet, despite apex court's order, industrial alcohol continues to be under GST. It's classified under HSN Code 2207 and attracts 18% GST. How, then, should matter be resolved going forward?
States should not rush to levy excise. The council must take cognisance of top court's order and recommend that states be free to levy excise under their laws. Gol should ensure that this decision is implemented immediately.
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States should also take cognisance of fact that 18% GST levy was imposed with input tax credit (ITC). It is unlikely that they can put in place a mechanism to provide credit for taxes paid on inputs, all of which will remain within GST regime. States should, therefore, fix an excise rate that broadly mimics effective GST burden after ITC is availed.
States have lost what is their legitimate revenue was from Oct 23, 2024, date of Supreme Court order. Gol could consider proportionately distributing revenue collected from industrial alcohol to manufacturing states concerned. That would be magnanimous step, one that would strengthen Centre-state fiscal relations and build trust.
Tags: #IndustrialAlcohol #GSTCouncil #Federalism #Excise #SupremeCourt #NajibShah #StateRevenue #HSN2207 #DenaturedSpirit #CentreState