Liquor industry welcomes decision to keep key alcohol ingredient out of GST

The ingredient, extra-neutral alcohol, accounts for 30-35% of the production cost for Indian-made foreign liquor

Liquor industry wants alcohol to be brought under the goods and services tax (GST), but is elated with the GST Council's exemption to extra-neutral alcohol (ENA), a key ingredient of alcoholic beverages.

What explains this apparent contradiction within the liquor industry?

Vinod Giri, director general of the Confederation of Indian Alcoholic Beverage Companies (CIABC), sheds light on this paradox, explaining that the industry's ideal scenario would involve bringing all aspects of alcohol production under GST to ensure uniform tax rates and pricing nationwide. However, he points out a significant challenge: if raw materials face GST while the final alcoholic product remains exempt, it would create difficulties for the industry.

"So, until all of alcohol is under GST, we would want the primary raw material to be kept out as well," he says.

He elaborates that since alcoholic beverages are not included in the GST system, companies are unable to claim input tax credits, resulting in the inability to recover GST paid on raw materials.

In contrast to most fast-moving consumer goods (FMCG), where companies set prices, prices of alcoholic beverages are determined by state governments, which means companies are unable to pass on this additional cost to consumers.

ENA accounts for nearly 30-35 per cent of the production cost for Indian-made foreign liquor (IMFL). If ENA were to be included in the GST ambit, many companies could face viability challenges, Giri says, clarifying why the industry is happy with the GST Council's decision.

Currently, some states impose value-added tax (VAT) on ENA, while others do not. On average, the VAT rate is less than 2 per cent nationally, whereas GST would have been 18 per cent, according to Giri. Additionally, many states allow VAT to be offset against the final product's cost, effectively nullifying the cost, a benefit not offered by GST, he says.

Over the weekend, the GST Council decided to maintain ENA's exclusion from the GST framework. The Council's law committee will explore necessary legal amendments to formalise this decision.

This move by the GST Council is expected to alleviate confusion, particularly in states like Uttar Pradesh. After the introduction of GST, the Allahabad High Court had ruled that the state could no longer apply VAT to ENA, implying that GST should be imposed on it. The UP government, along with industry bodies such as CIABC, challenged this order in the Supreme Court, Giri says.

Following the Allahabad order, the Commercial Tax Department of Madhya Pradesh (MP) demanded GST on ENA. Companies appealed, and the MP High Court temporarily halted the demand until the Supreme Court decides the matter.

Prem Dewan, CMD of Devans Modern Breweries Ltd, welcomes the GST Council's decision as a significant relief for the liquor industry. He expresses concerns over the potential financial implications, asserting that the industry could have faced numerous closures had the courts ruled in favour of imposing GST on ENA.