GST Council set to amend alcohol tax laws, enable dispute settlement

The Goods and Services Tax (GST) Council is planning amendments to GST laws concerning extra neutral alcohol (ENA), a highly pure form of alcohol used in liquor production but not for direct consumption. These changes aim to clarify that ENA should not be subject to GST, potentially bringing much-needed relief to the spirits industry by avoiding dual taxation.

In addition to the legislative tweaks, the Council is also expected to propose a scheme that would allow central and state tax authorities to drop the recovery of past tax dues, benefiting the spirits sector. This move is part of a broader effort to resolve ongoing tax disputes and streamline the taxation process.

At its meeting scheduled for Saturday in the national capital, the GST Council will review amendments recommended by a committee of officers. This committee was tasked with drafting legislative changes to ensure ENA remains outside the GST regime—a decision first taken at the GST Council’s 52nd meeting on October 7 last year, according to two people with the Centre-state discussions.

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The proposed amendments aim to prevent ambiguity in tax implementation by specifying that ENA is excluded from GST under section 9 of the Central and state GST laws. This section currently provides for GST on goods and services other than liquor for human consumption but does not explicitly mention ENA.

The clarification is expected to prevent the same commodity from being taxed under different taxation streams, alleviating the tax burden on the alcoholic beverage industry. The Centre will propose amendments to the CGST and IGST Acts in Parliament, while states will amend their respective SGST laws.

ENA, derived from fermenting and distilling molasses or grain, has historically been understood to be outside the GST framework since the indirect tax reform began in 2017. However, discrepancies in its application have caused confusion and hardship for producers.

Experts said the proposed changes will streamline the taxation of the liquor industry and provide certainty to producers. 

“Making sure that ENA is taxed only under the excise duty regime and bringing clarity to the GST laws to that effect will bring relief to the industry and help in reducing litigation as the taxation of this commodity will become uniform across the country,” said Rajat Mohan, executive director at accounting and advisory firm Moore Singhi.

IP Suresh Menon, secretary general of The International Spirits & Wines Association of India (ISWAI), emphasized the importance of keeping ENA under the state excise and VAT regime. This would allow producers to continue utilizing VAT credits, which would not be possible under GST, potentially increasing production costs and affecting sales and state tax revenues.

“Levy of GST would have become an added cost without tax credit facility, potentially leading to cost pressures for the producers, adversely affecting sales as well as tax revenue to the exchequer of the states,” Menon explained. He added that the proposed legislative amendments would benefit both the states and the spirits industry while protecting consumers from additional costs.

The spirits industry is diverse, with segments including integrated producers who make their own molasses and do not pay GST on the raw material, those who buy molasses with GST, and those who brew liquor from grain without having to pay GST on the raw material. This diversity has led to uneven production costs and varying state interpretations of GST applicability, resulting in past litigation.

“The proposal to close past tax periods without demand or refund will bring much needed closure to a long-pending issue to the industry,” Menon noted.

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"In its 52nd meeting, the GST Council, despite having the legislative competency to tax extra neutral alcohol, had agreed that states would levy tax on the ENA used for manufacture of alcoholic liquor for human consumption. However, the actual legal implementation of this decision by appropriate amendment was pending," said Payal Thaker, partner at BDO, a consulting firm. "It is expected that the GST Council would address this in the upcoming GST Council meeting," she said.

The GST Council will also consider a proposal to mandate the GST Appellate Tribunal to handle GST-related profiteering cases, a responsibility currently managed by the Competition Commission of India (CCI). The CCI has requested the government to transfer this responsibility, arguing that its primary role is to ensure market competition rather than directly intervene in pricing matters, according to another source.

Emails sent to the finance ministry, CCI, and GST Council for comments on these issues remained unanswered at the time of publication.

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