By D B Bhaskara Sharma
IT is more out of intaxication (a word coined by a famous TIOL writer) than intoxication that I write about beer and tax. Though it may sound curious and rubbish, certainly it is not an issue to brush aside. The moot question is "can this nascent statute (Service Tax) enter into an arena - taxing the business of alcoholic liquor - which the Central Excise statute failed to do in its 62 years of existence?"
According to latest estimates, the State Governments have garnered around Rs 26000 Crores through state excise on liquor trade, which is considered to be a major revenue source to State Governments after VAT. There is nothing wrong if Central Government is also eying for a slice of this liquor trade. According to Industry pundits "beer wars" are going on between national and international players in liquor business to expand their market presence and to capture a slice of the growing (7-8% per annum) beer business. India is seen as future destination for liquor trade thanks to the increase in income levels of middle class and change of Indian attitude towards alcohol consumption. An estimated 110 million cases of beer is being sold in India every year and per capita consumption is around 0.7 Litres. The industry players are trying to increase this per capita consumption to the levels of developed world through all means - surrogate advertisements and political lobbying to reduce taxation levels. It is in this background, taxation on beer production by Central Government assumes importance.
- Liquor manufactured in India is categorised as beer, country liquor, and Indian Made Foreign Liquor (IMFL). IMFL production includes wines, whisky, rum, vodka, gin and brandy. The place where beer is produced is called brewery, and distillery is one where Indian Made Foreign liquor is produced. The brand owners source the beer either by producing beer from their breweries owned by them or through outsourcing production through tie-ups or contract brewing. Normally the tie-ups are in areas where the brand owners do not have any unit, or do not have the capacity for brewing beer. Through, such a sourcing network that the brand owner can sell the product produced in a state, within the same state, as movement of alcoholic beverages across the states is not allowed. Many international players are trying to enter Indian liquor business through this route of outsourcing beer production, which is also known as contract brewing. Contract brewing company or contract brewery - A business that hires another brewery to produce its beer. The principal company generally handles all of the beers marketing, sales, and distribution, while leaving the brewing and packaging to the producer-brewery which, referred to as a contract brewer. For example United Breweries, which holds 50% of market share, outsources 30% of its supply through 11 contract breweries spread across the country. UK based - Cobra Beer Ltd, which produces beer with Cobra brand name, is expanding its Indian operations by outsourcing beer supply to Mount Shivalic Breweries Ltd, Rajasthan, which produces Cobra beer for Indian market. And for this reason more and more international brands are trying to enter Indian market through tie-ups or contract brewing. The focus of this article is the possibility of bringing such contract brewing or tie-ups under Service tax purview, because beer, like all alcoholic beverages, is currently not subjected to any Central excise, since its taxation falls under the purview of State Governments.
I am not going to details of the mode of contract manufacturing to save valuable time of netizens and wish to discuss only the taxation aspect of such contract manufacture. This contract manufacture is nothing but production of goods for or on behalf of another person, and squarely falls within the definition of Business Auxilliary service (BAS). The definition of Business Auxilliary Service at sub-clause (v) covers the activity of production or processing of goods for or on behalf of the client. However, the definition of BAS specifically excludes from its purview any activity that amounts to manufacture within the meaning of clause (f) of section 2 of the Central Excise Act, 1944..
One opinion is that since Central Excise Tariff does not contain any entry relating to alcoholic liquor for human consumption, any production of alcoholic liquor for human consumption is not manufacturing to be covered with in the purview of Central Excise, hence obviously taxable under BAS.
This line of argument does not appear to be correct, if we look at the relevant provisions of Constitution with regard to taxation of alcoholic liquors :
According to Article 246 (3) of the Constitution of India, the Legislature of the State has exclusive powers to make the laws for the State or any part thereof with respect to any of the matters enumerated in list II of the Seventh Schedule of the Constitution. Item No. 8 of the List II mentions intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors. Item No. 66 of the List II of the Constitution empowers the State Legislature to impose fees in respect of any of the matter enumerated in this list.
Entry 51 of List II reads as follows:
Entry 51: Duties of excise on the following goods manufactured or produced in the state and countervailing duties at the same .........................
• alcoholic liquors for human consumption,
• opium, Indian hemp and other narcotic drugs and narcotics
but not including medicinal and toilet preparations containing alcohol or any substance including in sub-paragraph (b) of this entry
Entry 84 of List I of Schedule 7 of Art.246- under which central excise duty is levied and collected read as follows :
Entry 84 - Duties of excise on tobacco and other goods manufactured or produced in India except-
(a) alcoholic liquors for human consumption,
(b) opium, Indian hemp and other narcotic drugs and narcotics
but including medicinal and toilet preparations containing alcohol or any substance including in sub-paragraph (b) of this entry
Thus by examining the above provisions of the Constitution, it is clear that centre has no jurisdiction to levy duties of excise on alcoholic liquors for human consumption manufactured or produced in India. In other words alcoholic liquors are not taxed under Central Excise, not because it is not a manufacturing activity, but because of specific exclusion under entry 84 of List I. Thus Central Government has no jurisdiction to levy any duties of excise on alcoholic liquor for human consumption, despite them being produced out of manufacturing activity (as entry 84 of the List II itself recognizes it as manufacturing activity). This is the reason, why there is no entry specifying alcoholic liquor (for human consumption) in the Central Excise Tariff.
Next question that may arise is "will this come in the way of imposing Service Tax?" - on contact manufacture ( production for or on behalf of the client ) of beer under Business Auxiliary Service.
Power to impose service tax is presently drawn from Entry 92C of List I of the Constitution, which reads "taxes on services "(previously the authority for imposition of service tax was residual Entry 97 of List III of Schedule 7 of the Constitution). Since, this entry does not specifically prohibit or exclude levy of service tax on any activity falling within the scope of service tax even though it relates to matters concerning alcoholic liquors for human consumption. Thus there is no restriction to collect service tax on contract manufacture or production of beer under Business Auxiliary Service. But, the only hitch is that the definition of BAS excludes manufacturing activity within the meaning of clause (f) of Section 2 from its purview. The solution to obviate this hurdle is to amend the definition of manufacture given at clause (f) by adding the following:
"Provided that production or manufacture of alcoholic liquor (for human consumption) for or on behalf of the client does not constitute manufacture for the purpose of this clause"
or by making suitable amendment to the definition of Business Auxiliary Service.
But, as this amounts to amending the provisions of statute, this can be done only during presentation of Finance Bill, 2007. Till such time count the chicks (contract manufacturers or bottlers in case of liquors other than beer) that may hatch.
In fine, it is not wrong if Central Government also eyes for its share of this ever-growing liquor business obviously through Service Tax statute. If this happens it will not only help in bringing additional revenue to central "kitty" but also give necessary "kick" to the officers concerned.
P.S. : In all these endeavours in collecting more revenue both by Governments and Industry players, there stands a mute witness - Art.47 of the Constitution- waiting for some body to take up its cause, which reads as follows :
"........................ the state shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health "
(The author is working with the Department and the views expressed are personal)
