JULY 10, 2018

By K K Sharma, Member, Central Board of Excise & Customs (Retd.)

IN my previous article on the taxability of liquor licences, I had explained in considerable detail how and why:

(i) grant of liquor licences by various State Governments to liquor vendors was a taxable

service both under the erstwhile Service Tax law as well as the current GST law;

(ii) though the providers/suppliers of this service were State Governments, tax thereon

was payable under reverse charge mechanism by the licensees, and not by the

Governments themselves; and

(iii) any claim made or advice given, to the contrary, by any State Government was inconsistent with all the relevant provisions of law.

2. As it turns out, a few State Governments have travelled well beyond making mere claims. They have gone to the extent of even amending their existing liquor licensing laws with a view to circumventing not only the Service Tax but even the GST law that levies tax on such licences. The whole strategy and effort seems to be directed at somehow denying any jurisdiction to the Union Government with respect to anything that may even remotely be related to the alcoholic liquor for human consumption. Such official actions seem to have armed the liquor licensees, who had either already received service tax demand notices or were expecting to receive them, with various legal arguments. Not surprisingly, they have challenged the notices raising such demands in High Courts and prayed inter alia for their dismissal.

3. Three broad arguments have been advanced against taxability of liquor licences under the Service Tax or GST law and concomitantly in support of States' exclusive jurisdiction over such licences. These arguments go as follows:

(i) There is no difference between licensing and registration or between licence fee and registration fee and, therefore, the service provided/supplied by way of grant of a licence is no different from that by registration. This parity has been propagated with a singular objective of avoiding payment of tax,for the service by way of registration, required under any law for the time being in force, was exempt under Notification No. 25/2012 dated 20.6.2012 as amended [Sl. No.58(a) of the table thereunder] in the Service Tax regime and continues to be exempt even under GST law [vide entry No. 47 of the table appended to Notification No. 12/2017-CT(R) dated 28.6.2017]. Accordingly, the argument goes, neither Service Tax nor GST is payable on the service provided/supplied by the State Governments by way of grant of liquor licences.

(ii) the licence fee charged for grant of licences is in fact an excise duty on alcoholic liquor for human consumption which falls in the exclusive jurisdiction of the States under Art. 246(3) read with entries No. 51(a)of the State List [relating to duties of excise on … alcoholic liquor for human consumption manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India ].As the excisability of such liquor continues to be within the exclusive legislative domain of the States even after the Constitution (101 st Amendment) Act, 2016, that paved the way for GST introduction, came into effect, so do the liquor licences, attracting in the process no central levy at all.

(iii) At least two States –Telangana and Andhra Pradesh– have gone to the extent of amending their Excise Acts/rules solely with a view to negating Central Government's jurisdiction over liquor licences. Consequently, in their view, any demand for tax on liquor licences on behalf of the Central Government is not maintainable.

4. Here, a brief reference to the said amendments will be in order. Under the Telangana Excise Act, 1968, while S.21 provides for levy of excise duty and countervailing duty on alcoholic liquor for human consumption,S. 22 lays down the modes of levying those duties. One of such modes included in Section 22(d) is the fees on licences for the manufacture, supply or sale of any excisable article. Then, S. 28 prescribes the Forms and conditions of licence etc. By an ordinance (Telangana Ordinance No. 5 of 2017) promulgated on 28.6.2017 (i.e. just three days before the GST was implemented), the State Government amended Telangana Excise Act, 1968 retrospectively w.e.f. 11 October 2016. One of the amendments made thereunder was an insertion, vide Clause 4(4) of the Ordinance, of an explanation to Section 28 which read as follows:

Explanation:- For the removal of doubts, it is clarified that any fees or charges by whatsoever name called, collected in pursuance of this section or clause (d) of section 22 or any other section of this Act or any rules made under this Act, from time to time, for granting any lease, licence or exclusive privilege for different purposes mention in sub-section (1) of section 17, shall irrespective of the time, mode and manner of such collection, be deemed to be and always deemed to have been Excise duty on excisable articles levied and collected under section 21. (emphasis provided)

5. This retrospectively effective explanation implied that:

(i) liquor licence fee was nothing but an excise duty on alcoholic liquor for human consumption;

(ii) excise duty on liquor fell in the exclusive legislative domain of the State in terms of Art. 46(3) of the Constitution read with entry 51(a) of the State List;

(iii) the Parliament had no power to make any law with respect to such a duty;

(iv) grant of liquor licence was not a taxable service under the Finance Act, 1994, nor was the fee, charged for grant of such licence, taxable thereunder; and therefore.

(v) any demand for Service Tax or even GST was ab initio unlawful.

6. It is to be noted that the excise duty that a State may levy in terms of Art. 246(3) of the Constitution read with entry 51(a) of the State List is only on the manufacture or production of alcoholic liquor for human consumption and on nothing else. However, by simply renaming and re stressing the liquor licence fee as excise duty, the Government of Telangana not only sought to retrospectively obliterate the Central Government's right to levy Service Tax on liquor licences, but also attempted to keep such licences outside the GST purview, lest the latter should share any tax revenue accruing from them.

7. Similarly, with effect from 23.6.2017, the Government of Andhra Pradesh brought in Andhra Pradesh Excise (Grant of License of Selling by Bar & Conditions of License) Rules, 2017 in place of the earlier Rules of 2005. The new rules reduced bars' liquor licence annual fee to Rs. 2 lakh which earlier ranged, depending on the population size of the village/town/city wherein a bar was located, from Rs.7.5 lakh to 18 lakh. Instead and in addition, the new Rules introduced non-refundable registration charges for the bars varying from Rs. 8 lakh to 28 lakh. Not only that, they extended the licence period from one year to five years. The new Rule 14(3) made it clear that the applicant shall pay the non-refundable registration charges and licence fee for five years' licence period before the commencement of the licence period either in one lump sum or in five equal installments at his option. (emphasis supplied)

8. Clearly, this innovative device of non-refundable registration charges for five years licence period was an unmistakable deception to impart legal equivalence to licensing and registration. This was a deliberate ploy to avoid payment of tax on licensing as a taxable service and to claim exemption for registration, for the service by way of registration, where ever required by any law in force, has remained, as noted in para 3(1) supra, exempt both during the Service Tax regime and the GST regime.

9. All these arguments and tricks to avoid payment of tax raise four fundamental issues:

A. Is there no difference between registration and licensing?

B. Do the duties of excise include the fees paid for obtaining liquor licences?

C. Are the rules made by Telangana and AP Governments constitutionally valid?

D. What will be the implications for liquor licensees resisting service tax and GST?

Let us examine these issues in detail.

A. Registration and Licensing

10. Though various State Excise laws define licence, none seems to have defined registration. The Andhra Pradesh Excise (Grant of License of Selling by Bar & Conditions of License) Rules, 2017, for instance, define licence and licensing period in R.2(m) and R.2(p) respectively. However, registration finds no mention in the said Rule 2. The only reference to registration in this Rule is in sub-rule (t) which defines Registration Charges to mean the non-refundable registration charge fixed per annum with an enhancement of 10% annually and includes proportionate non-refundable registration charges.

11. Even the Registration Act, 1908, that regulates the registration of documents and specifies the documents which must be or may not be registered, does not define the term registration. We have to necessarily, therefore, go by its ordinary dictionary meaning. Different dictionaries explain its meaning as follows:

(1) Oxford Advanced Learner's Dictionary : act of making an official record of something or somebody.

(2) www.businessdictionary.com:

(i) Entering certain information in a register, such as about invoices or mails received or delivered.

(ii) Provision of personal data by an applicant, guest, visitor etc.

(iii) Entering information relating to assignments, deeds, contracts of sale, judgements, mortgages, new securities etc. in a public record book.

(3) merrium-webster.com : (i) the act of   registering (ii)   an entry in a   register

(4) dictionary.cambridge.org : the act of recording a name or information on an official list .

(5) legal-dictionary.thefreedictionary.com : Enrollment; the process of recording entries in an official book.

(6) Financial-dictionary.thefreedictionary.com : process of submitting appropriate documents to a government regulator before an activity may be conducted .

A perusal of these dictionary meanings makes it abundantly clear that the term registration denotes nothing more than a simple action of making an entry about the existence of a person, document, thing, event and the like in an official register or record.

12. Does a licence carry the same connotation? According to R.2(m) of Andhra Pradesh Excise (Grant of License of selling by Bar and conditions of licence) Rules, 2017, which define a licence in their own context, it means a licence granted under these rules. In the case of State of Punjab v. Raghunath Dass [AIR 1968 Punj. 76 (at page 800], however, the Hon'ble Punjab High Court has observed that in its most natural sense, a ‘licence' is an authority justifying the doing of what otherwise would be wrongful. In the commonly accepted sense, the term means authority, or permission to do something specified, leave to do a thing which the licensor would otherwise have the right to prevent. A ‘licence' confers a right which does not exist otherwise. It is in the nature of a grant of a permission to exercise certain privilege. Or to carry on a particular business, or to pursue a particular occupation. In the popular as also in the legal sense, it is a permission to do something which, without the licence, would not be allowable .

13. It is thus obvious that the terms registration and licence are different in their import and implication. Further, registration is only a one-time entry in a permanent record such as registration of a motor vehicle, births or deaths, or sale deed of immovable property. A licence – renewable or otherwise -- on the other hand, is issued for a specified period indicated in the licence(document) itself.

14. The tax exemption under the Service Tax law and GST law, referred to in para 3(1) supra, is available only to a registration and that too only when it is required under any law for the time being in force. Examples of such mandatory registration include a year to year lease of an immovable property or an instrument of gift of immovable property etc. required u/s 17 of the Registration Act, 1908. Any exemption to such registration can by no stretch of imagination be applied to a liquor licence. Therefore, any claim of exemption from tax in respect of a liquor licence is improper and legally unacceptable.

B. Duties of Excise and Licence Fee

15. Just as a licence is incomparable to registration, so is a duty or tax to licence fee. Though in a generic sense, fee can be equated with tax, the Constitution of India expressly recognizes the uniqueness of two kinds of levies in terms of separate entries in the State List [51 for excise duties, 53 to 58& 60 to 62 for various taxes, and 66 for fees). In fact, the entries 96, 66 and 47 of each of the three Lists -- Union, State and Concurrent – deal only with fees in respect of matters in those Lists. Even Art. 277 containing a Savings clause refers to taxes and fees separately. Not only that,a money bill, as defined in Art. 110(1), includes a tax but expressly excludes fees under Art. 110(2).

16. That a duty/tax indeed stands in complete contrast to a licence fee has also been elaborately and repeatedly explained by the Hon'ble Supreme Court in various landmark judgements.In the case of Hindu Religious Endowments v. Lakshmindra Tirtha Swamiar [AIR 1954 SC 282 (at page 295)], the Supreme Court had observed that the distinction between a tax and a fee lies primarily in the fact that a tax is levied as a part of a common burden, while a fee is a payment for a special benefit or privilege. In Ratilal Panach and Vs State of Bombay [AIR 1954 SC 388], Hon'ble Supreme Court had differentiated a tax from licence fee as follows:

“A tax is in the nature of a compulsory exaction of money by a public authority for purposes, the payment of which is enforced by law. The other characteristic of a tax is that the imposition is made for public purpose to meet the general expenses of the State without reference to any special advantage to be conferred upon payers of the tax."

"although a tax may be levied upon particular classes of persons or particular kinds of property, it is imposed not to confer any special benefit upon individual persons and the collections are all merged in the general revenue of the State to be applied for general public purposes. Tax is a common burden and the only return which the taxpayer gets is participation in the common benefits of the State."

"Fees, on the other hand, are payments primarily in the public interest, but for some special service rendered or some special work done for the benefit of those from whom the payments are demanded. Thus, in fees there is always an element of quid pro quo which is absence in tax".

17. Thus, any attempt by the States to claim licence fee as a duty of excise and contest levy of Service Tax or GST thereon runs counter to the basic canons of law.

C. Constitutional validity of the Telangana and AP Government rules

18. As noted earlier in paras 4 to 6 supra, the Telangana Government has declared that the liquor licence fee, charged u/s 22(d) of the Telangana Excise Act, 1968, would be deemed to be an excise duty and that too retrospectively w.e.f. 11.10.2016. Similarly, the AP Government has brought into force new licensing rules where under it has substantially reduced the licence fee while, simultaneously and additionally, introducing a new registration charge, much higher than the erstwhile licence fee. Both the reduced licence fee and high registration charges for the licence period are payable, before the commencement of the said period, either as one lump sum or in five equal instalments.

19. It is as clear as daylight that the solitary purpose of those amendments carried out by the two Governments is to thwart any demand for service tax or GST on the liquor licence fee. In this connection, it is useful to remember that:

(i) prior to the GST roll out on 1.7.2017, levy of tax on services was the legislative prerogative of Parliament, as per Art. 246(1) read with entry 97 of the Union List;

(ii) consistent with that power, the Parliament had passed Finance Act, 1994 wherein Chapter V provided for the levy of tax on services;

(iii) a service was defined u/s 65B(44) of that Act as any activity carried out by one person for another for a consideration;

(iv) u/s 65B(37) (viii) ibid, the term person included Government ;

(v) Explanation (a)(i) to S.67 ibid clarified that consideration included any amount that is payable for the taxable services provided or to be provided;

(vi) the taxability of any service provided by Government to a business entity like liquor vendors remained unchanged even in the GST regime; and

(vii) the service by way of grant of liquor licence is classifiable under Service Code 999113 attracting aggregate tax rate of 18% (cGST 9% and sGST 9%).

20. Could any State Government sidestep this legal reality by employing what are clearly dubious maneuvers? The amendments, made to their respective State Excise laws by the Telangana and AP Governments,clearly amount to legislation on a subject which was outside their lawful authority. What they could not do directly (avoiding payment of service tax on liquor licence fee collected by them, which though was payable under reverse charge by the licensees themselves), they have attempted to do indirectly (by redefining licence fees as excise duties or renaming licence fee as registration charges). The said amendments are thus a piece of colourable legislation as explained by the Hon'ble Andhra Pradesh High Court in the case of V. Sesha Sharma Vs. State of AP AIR 1960 AP 461: The idea conveyed by the expression is that although apparently, a legislature in passing a statute purported to act within the limits of its powers, yet in substance and in reality it transgressed these powers, the transgression being veiled by what appears on proper examination, to be a mere presence or disguise. The amendments are thus invalid in the eyes of law.  

21. Even otherwise, the said amendments of State laws are without doubt repugnant to the provisions of the Finance Act, 1994 and the cGST Act, 2017 (in short "cGSTA") which have been passed by the Parliament. How sucha legislative incongruity, if and when it occurs, is to be addressed has been laid down in Art. 254(1) of the Constitution: If any provision of a law made by the Legislature of a State is repugnant to any provision of law made by the Parliament which Parliament is competent to enact ------- the law made by Parliament --- shall prevail and the law made by the Legislature of the State shall, to the extent of repugnancy, be void.

22. Thus, the amendments made as above, being colourable in nature and repugnant to the Finance Act, 1994 and cGSTA are void. Any demand for Service Tax on liquor licences raised for the period prior to 1.7.2017 or for GST (both sGST and cGST) thereafter is lawful and enforceable.

D. Implication for Liquor Licensees

23 . Having regard to the foregoing analysis of relevant laws, it is evident that the liquor licensees are liable to pay Service Tax as well as GST,under reverse charge, respectively under Rule 2(1)(d)(E)(b) of Service Tax Rules, 1994 and u/s 9(3) of cGST Aread with Notification 13/2017-CT(R) dated 28.6.2017 (sl. No. 5 of the table) as also under sGST Acts of different States. The taxes are payable on the full amount of licence fees paid by them to the State Governments, including what has been disguised as Duties of Excise or Registration Charges. Any failure to pay up those taxes may inter alia entail, apart from the payment of those taxes:

(i) payment of interest on delayed payment of:

(a) Service Tax, at the punish ingrates of 18%, 24% and 30% per annum,upon the delay respectively of 6 months, 6 months to one year, and beyond one year, in payment of service tax,in accordance with the provisions of S. 75 of Finance Act, 1994 read with notification No. 12/2014-ST dated 11.7.2014;

(b) cGST/ sGST at the rate of 18% per annum u/s 50 of cGSTA read with Notification No. 13/2017-CT dated 28.6.2017 as also that issued under various State GST Acts;

(ii) payment of mandatory penalty equal to the tax not paid u/s 78 of the Finance Act, 1994 as well as S.122(2)(b) of the cGSTA and respective State GST Acts; and

(iii) possible imprisonment u/s 89(1)(a) of Finance Act, 1994 and u/s 132(1)(e) of cGSTA / sGSTA.

24. Even if the GST Council recommends exemption from GST to liquor licences, which is highly unlikely given the nature of goods involved, it will be effective only prospectively from the date on which appropriate exemption notifications are issued. Tax exemptions are seldom applied retrospectively. The liquor licensees would be well advised,therefore, to be wary of any advice to the contrary that sounds temptingly convenient today.

(The author is based at Chandigarh and is associated with GSTaxperts as Chief Patron. The views expressed are strictly personal.)