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Conundrum around taxability of ENA under GST

Conundrum around taxability of ENA under GST

The main question that arises is whether levying VAT on ENA can be considered as a correct practice? Or Whether GST is leviable on supply of ENA?

During the 43th GST council meeting most of the states requested to continue levying VAT/ CST in respect of ENA as bringing it under the purview of GST would affect the tax revenue of the states.  During the 43th GST council meeting most of the states requested to continue levying VAT/ CST in respect of ENA as bringing it under the purview of GST would affect the tax revenue of the states.

Applicability of GST (goods and services tax) on Extra Neutral Alcohol (ENA) has been a raging issue since the introduction of GST four years back.  
 
Owing to lack of clarity on the matter, divergent practices are being followed by manufacturers or suppliers where some of them are paying GST on the sale of ENA while the others are paying VAT/ CST treating it akin to “alcoholic liquor for human consumption”, a commodity outside the purview of GST.  
 
These divergent practices have wide implications on revenue and because of this reason the issue has been deliberated several times in various GST council meetings.

During the 43th GST council meeting most of the states requested to continue levying VAT/ CST in respect of ENA as bringing it under the purview of GST would affect the tax revenue of the states.  

However, there were some states which felt that bringing ENA under GST purview would benefit them. Finally, the said agenda was deferred, prolonging the confusion for the industry.  
 
The main question that arises is whether levying VAT on ENA can be considered as a correct practice? Or Whether GST is leviable on supply of ENA?  
 
As per Article 366(12A) inserted by the 101st Constitutional Amendment Act, “goods and services tax” means any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption.  

Therefore, GST is not leviable on alcoholic liquor for human consumption. Since, the power to tax such liquor has been exclusively vested in the state governments, alcoholic liquor for human consumption continues to attract state levies.  
 
This leads to the next question whether ENA is “alcoholic liquor for human consumption”. ENA contains over 90% alcohol by volume and is a primary raw material used in the manufacture of alcoholic beverages.  
 
In the past, this issue has been deliberated in several judgements in the context of applicability of state excise duty.  

In the landmark case of Synthetics and Chemicals Vs State of UP the apex court held that the expression ‘alcoholic liquor for human consumption’ means that liquor which is capable of being consumed by human beings as such, as beverage or drinks.  

Further, in the case of State of UP Vs Modi Distillery the apex court relied upon the judgement of constitution bench in the case of Synthetics and Chemicals Ltd.(supra) and held that the state can levy excise duty only upon alcoholic liquor fit for human consumption when its manufacture is complete and not upon the raw material or input still in process of being rendered fit for consumption by human beings.  
 
In the GST regime, the issue of taxability of ENA came up before the Telangana Authority of Advance Ruling in Madhucon Sugar and Power Industries Ltd.  
 
However, the authority refused to decide on the matter since the issue is pending before GST council for a decision.  

In the absence of clarity by the GST council, the confusion in the industry is writ large.

In this backdrop, recently, the Allahabad High Court has pronounced a decision on the issue in the case of M/s Jain Distillery Private Limited Vs State of UP and 5 others.  
 
The division bench of Allahabad High Court relied upon the judgement of Constitution Bench in the case of Synthetics and Chemicals Ltd.(supra) and concluded that ENA is not covered under ‘alcoholic liquor for human consumption”.  
 
The court considered Article 366(12A) and held that ENA is subject to GST. The court further stated that the state has lost its legislative competence to enact laws to impose tax on sales of ENA, upon the enactment of the 101st Constitutional Amendment.  
 
The said decision has opened up a flood gate of questions for the manufacturers/ suppliers of ENA across the country who have been paying VAT/CST on sale and also the buyers who have been availing credits of such VAT/CST and setting it off against the VAT paid on sale of alcoholic beverages.  
 
The judgement of the Allahabad High Court, though based on sound reasoning, will only have a persuasive value before the other state High Courts. In the absence of any clarification by the GST Council, the confusion for the industry continues.  
 
In these circumstances, the issue will attain finality only when it reaches the Supreme Court and a final decision is pronounced on the matter.  

(Anshul Mathur, Partner & Sangitha, Consultant, Lakshmikumaran & Sridharan Attorneys.)
 
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