MARCH 24, 2017

By Nikhil Mediratta, Associate, Lakshmi kumaran & Sridharan

ENTRY 51 to List II of Schedule VII read with Article 246 of the Constitution of India empowers the State Government to legislate on duties of excise, inter alia, on 'alcoholic liquor for human consumption' manufactured or produced in the State and levy countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India.

The State Governments continue to enjoy a handsome amount of revenue from the liquor manufacturing industry. It would here be important to mention that a Constitution Bench of the Supreme Court of India in the case Khoday Distilleries Ltd. V. State of Karnataka (1995) 1 SCC 574 had ruled that a citizen has no fundamental right to trade or to do business in liquor as a beverage. The Court held that the State can prohibit completely the trade or business in potable liquor since liquor as a beverage is res extra commercium. It was also held that the State can place restrictions and limitations on such trade or business which may be different from the nature of restrictions and limitations imposed on trade or business in articles which are res commercium.

The Constitution (One hundred and first) Amendment Act, 2016 provides for the levy of Goods and Service Tax. The phrase 'goods and service tax' has itself been defined under the newly inserted clause (12A) to Article 366 to mean any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption . Also, the amended Entry 54 to the State List, inter alia, empowers the State Government to levy tax on sale of alcoholic liquor for human consumption. Accordingly, levy of GST on alcoholic liquor for human consumption is constitutionally impermissible.

All representations made before the Government for induction of this highly regulated industry within the GST regime to prevent cascading of taxes and streamlining the levy of taxes were unsuccessful.

It can clearly be seen that this industry will continue to be subject to the existing laws. The question which requires consideration is that despite alcoholic liquor for human consumption per se being out of the GST net, will roll out of GST not have an impact on this industry? The answer has to be in the negative.

The new regime of levying Indirect Tax has only excluded levy of GST on 'alcoholic liquor for human consumption'. But what about inputs that go into manufacture of it? The liquor bottles, packaging material, bottle caps and other material, not being alcoholic liquor for human consumption, will be regulated by GST only. What will happen to the input credits on purchase of these materials? No offset might be available for the reason that there is no GST on the output side. The exclusion of liquor will not only lead to cascading of taxes but is one indication of this industry being governed both under the existing State laws and also GST leading to multiplicity of compliances.

The liquor industry consists of a number of international as well as domestic players who hold Brand Names, Trade Marks, process know-how and other Intellectual Property Rights with respect to potable alcoholic beverages for human consumption. These Brand Owners generally enter into arrangements with the Bottling Units who have valid permissions and licenses from the State Authorities. Such arrangements may be in the nature of a Brand Licensing Arrangement, a Contract Manufacturing Arrangement or a Lease Arrangement. The implications under the present regime depend on the nature of arrangement between the Brand Owner and the Bottler.

It will here be important to mention that input costs, such as transportation, under the GST regime might increase. Further, no input credit will be available since the output is out of the GST net.

Accordingly, the industry needs to gear up and analyze the most efficient and suited business model taking into consideration the implications, especially on the input side, under the new regime.