GST UPDATE

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Taxability of Extra-Neutral Alcohol (ENA) under GST

Introduction to ENA:

?Extra-neutral alcohol (ENA) is a highly distilled, food-grade alcohol with over 95% alcohol content. Derived from sugarcane molasses or grains, it undergoes multiple distillations to become colorless and odorless. ENA is widely used in producing alcoholic beverages such as whiskey, vodka, gin, and rum.

Definition of 'Alcoholic Liquor for Human Consumption':

?In the Synthetics and Chemicals Ltd. vs. the State of UP case, the Supreme Court defined 'alcoholic liquor for human consumption' as liquor that humans can consume as a beverage. Industrial alcohols like ethyl alcohol, used as inputs in manufacturing intoxicating liquor, do not qualify.

Uses of ENA:

?Besides alcoholic beverages, ENA is used in pharmaceuticals, cosmetics, flavors and fragrances, electronics, and printing.

Taxability Disputes:

?The taxability of ENA and rectified spirits has been contentious between the Union and State Legislatures, leading to conflicting clarifications and uncertainty.

Constitutional Provisions:

Article 246 of the Indian Constitution grants Parliament the exclusive power to legislate on Union List matters, excluding alcoholic liquor for human consumption from Union excise duties (Entry 84). States can tax the manufacture and sale of alcoholic liquor for human consumption under Entries 51 and 54 of the State List. Article 366 (12A) defines GST, excluding alcoholic liquor for human consumption.

Pre-GST Legal Precedents:

?State of UP vs. Modi Distillery: States can levy excise duty only on alcoholic liquor fit for human consumption.

?Bihar Distillery vs. Union of India: States can levy excise duty on spirits that can be diluted to make them fit for human consumption.

Post-GST Quandary:

?The introduction of GST has intensified debates on ENA's taxability. Section 9(1) of the CGST Act and Section 5(1) of the IGST Act exclude alcoholic liquor for human consumption from GST, leaving ENA in a grey area.

Industry Practices:

?The liquor industry typically levies VAT on ENA, treating it as an input for alcoholic liquor production. However, some sectors argue for its inclusion under GST.

Himachal Pradesh Clarification:

?In 2018, Himachal Pradesh clarified that 18% GST applies to ENA used in manufacturing alcoholic liquor for human consumption, raising questions about the GST Council's role.

Telangana AAR Ruling:

?The Telangana Authority of Advance Ruling in the case of Madhucon Sugar and Power Industries Ltd. refrained from deciding on ENA's taxability due to pending GST Council decisions.

Allahabad High Court Ruling:

?In M/s Jain Distillery Private Limited vs. State of UP, the court ruled that ENA is not 'alcoholic liquor for human consumption' and is subject to GST, challenging the status quo and potentially impacting the industry.

Implications and Need for Clarification:

?The Allahabad High Court's decision suggests a shift towards GST for ENA, potentially increasing production costs without set-off benefits under GST. VAT on ENA purchases can offset VAT on potable alcohol sales, but GST on ENA complicates matters for the liquor industry.

Budget 2024 Proposals:

?Amendments to the CGST Act, IGST Act, and UTGST Act propose excluding un-denatured ENA or rectified spirit used for manufacturing alcoholic liquor for human consumption from GST. This indicates a shift in the taxation policy, requiring clarity for manufacturers and suppliers.

Link:https://www.linkedin.com/pulse/desk-ca-praveen-sharma-series-544-taxability-alcohol-5s8tc

CA. Praveen Sharma

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