Taxability of ENA: Closing the Chapter or Opening a New Frontier?

Since the inception of Goods and Services Tax (“GST”) in July 2017, taxability on undenatured extra neutral alcohol (ENA) or rectified spirit used in manufacturing of alcoholic liquor for human consumption has been a subject of disagreement between the Central and the State Government, impacting the entire alcohol industry.

The introduction of the Finance Bill by the third-term Government on 23-7-2024 has proposed an amendment in Section 9 of the Central Goods and Services Tax (“CGST”) Act, 2017 to exclude undenatured ENA and rectified spirits used for manufacturing alcohol liquor for human consumption from the ambit of GST. The same has been greeted with guarded excitement by the taxpayers.

However, the question that remains is whether after this amendment, the doubts surrounding the taxability of ENA will be put to rest, or are we still standing on the edge?

Background

Before the introduction of GST, India’s tax framework for alcoholic liquor for human consumption was distinctly divided between the Centre and the States.

In order to introduce the GST, the 101st Constitution Amendment Act was introduced wherein the definition of “goods and services tax” was inserted under Article 366(12A) of the Constitution of India (“Constitution”) to mean any tax on supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption.

Accordingly, the taxability on the supply of alcoholic liquor for human consumption was kept outside the ambit of GST, since its inception.

The issue of taxability on ENA under GST has persisted for a long time and has become a subject of deliberation time and again since the 20th GST Council Meeting. The debate attained finality in the 52nd and 53rd GST Council Meetings, wherein it was decided that ENA would be kept outside the ambit of GST. The 52nd GST Council Meeting clarified that the intention of the GST Council is to keep ENA used in the manufacture of alcoholic liquor for human consumption, outside the ambit of GST.

In line with this background, an amendment has been proposed to be introduced in Section 9(1) of the CGST Act to exclude ENA when supplied for manufacturing alcoholic liquor for human consumption from the scope of GST.

Although this is a welcome change for the industry, it has itself opened a bag of new battles and challenges for the taxpayers.

The fate of past transactions: unknown?

The Finance Bill, 2024 is silent on the aspect as to whether the amendment will have a prospective or retrospective effect. This has left a significant question mark for businesses and tax authorities.

Post the announcement of the press release after the 52nd GST Council Meeting held in October 2023, the industry gained considerable clarity on the intention of the Government to exclude ENA from GST and consequently, several suppliers ceased paying GST on ENA after the said Council Meeting.

Given this backdrop, the lack of clarity regarding the date of applicability of the proposed amendment has raised critical questions. If the amendment is made applicable retrospectively, which seems unlikely, the issue that needs to be addressed is whether the businesses who have already paid the GST will be eligible for refund of the tax paid in past.

Conversely, if the amendment is applicable prospectively, businesses would face huge GST liabilities coupled with interest for the past period. In such cases, whether the industry will be able to explore the option of filing representation to the Government to issue a notification under Section 11 of the CGST Act, and seek relief for the past period, has to be seen in due course of time.

What all is covered under Section 9?

The proposed amendment has specifically excluded undenatured ENA or rectified spirit used for manufacture of alcohol liquor for human consumption from the ambit of GST.

There are various intermediate goods to manufacture alcoholic liquor for human consumption which may have properties equivalent to that of ENA/rectified spirit/alcoholic liquor but may not be explicitly covered under the above category. The industry awaits clarity on whether these products could be considered to be outside the ambit of GST by equating them with ENA/rectified spirit or alcoholic liquor for human consumption.

Whether the amendment of Section 9 of the CGST Act is constitutionally valid?

The decision of the seven-Judge Bench of the Supreme Court in Synthetics and Chemicals Ltd. v. State of U.P.¹ had been taken into account while amending Section 9. The Supreme Court in the said case held that “alcoholic liquor for human consumption” means liquor which is capable of being consumed by human beings as a beverage or drink. It was held that States were not entitled to levy any tax on industrial alcohol which is not meant for human consumption.

A series of judgments following the judgment of the seven-Judge bench Bench in Synthetics and Chemicals Ltd. case², held that ENA, having high content of alcohol, is different from alcoholic liquor for human consumption as the same is unfit for consumption, “as it is” without further processing.

The levy provided in Section 9 of the CGST Act has birthed from Article 366 of the Constitution, which defines “goods and services tax”, explicitly excluding alcoholic liquor for human consumption from the GST framework, and not raw materials used for manufacturing of the said liquor.

Since ENA has not been considered as “alcoholic liquor for human consumption”, this raises a critical question on whether the Centre possesses the authority to amend Section 9 of the CGST Act to exclude ENA from GST, without an accompanying constitutional amendment?

It is not in doubt that the Centre has time and again cleared its intention to not levy GST on the supply of ENA/rectified spirit used for the manufacturing of alcoholic liquor for human consumption. The moot question which arises here is whether an amendment in Section 9 would be the correct legal route to exclude ENA from GST or the introduction of an exemption under Section 11 would be a better route for the Government to avoid unwarranted disputes?

Here, the mention must be made to the fact that the issue on whether the State has the power to levy tax on industrial alcohol under Entry 33 of the Concurrent List is pending before a nine-Judge Constitution Bench led by the Chief Justice of India, wherein the correctness of the judgment of the seven- Judge Bench in Synthetics and Chemicals Ltd. case³ is under consideration.

Thus, in case the nine-Judge Bench holds otherwise (i.e. State has power to levy tax on ENA) it could also raise profound questions on the need of the prospective amendment of Section 9. Although the recent amendment seeks to clarify the fate of ENA, the broader legal uncertainties remain unresolved. The impending nine-Judge Bench decision will also be pivotal in shaping the fate of this amendment.

If not GST, whether VAT/excise duty leviable?

Although the proposed amendment brings some clarity to the long-standing debate on the taxability of ENA, however, it also raises a crucial question that if GST is not applicable then whether the States are empowered to levy excise duty or value-added tax (VAT) on the same?

States are only empowered to impose tax on alcoholic liquor for human consumption. While some courts have quashed the notifications levying State VAT on ENA, its taxability under excise duty and VAT remains ambiguous till the matter is finally decided by nine Judge Bench.

Conclusion

While the proposed amendment in Section 9 is undoubtedly a welcome move for the alcohol industry, it has been greeted with cautious optimism.

The said amendment has introduced a cloud of uncertainties amongst the people. The unresolved status of these issues will only continue to create challenges for the taxpayer and the tax authorities, unless resolved by the Government. It is crucial for the policymakers to address these gaps promptly to let the industry finally take a sigh of relief for once and for all.