GST on Liquor in 2022 [Tax Rates, HSN Codes]

The liquor industry constitutes a significant chunk of India’s revenue. It’s also one of the most significant Alco beverages sectors across the globe. The Indian liquor market is further estimated to grow at a CAGR of 7.4% during the period 2017-2030.

Each of the 29 states of India list down their own set of rules regarding taxing liquor. For instance, in Gujarat, liquor is prohibited, whereas, in states like Kerala, Tamil Nadu, Bihar, various restrictions have been imposed on alcohol consumption.

Uttar Pradesh collected the highest revenue from the excise tax on liquor, totalling Rs 31,517 crore in 2019-20. However, even Puducherry earns its primary income from alcohol trading, while Goa has the least alcohol tax rates.

Taxation of liquor

GST was introduced in 2017 as a significant indirect tax subsuming multiple indirect tax laws existing in the country. It applies to the supply of all goods and services. However, liquor meant for human consumption is kept outside its purview. Hence, even today, the old taxes and fees continue to apply to liquor, which includes:

• Excise duty on production of alcoholic liquor for human consumption
• State Value Added Tax (VAT) on its sale
• Fee such as gallonage fee, and license fee

Thus, speaking of just the sale of liquor for human consumption, the tax rules are pretty simple. GST is not levied on liquor for human consumption. However, VAT is applicable on total supply value.

While the output remains under the already existing taxation regime, i.e., Excise duty and VAT, GST is applicable on:

• All Inputs used/to be used in the course or furtherance of the business
• All input services used about alcoholic beverages

A primary concern here is the non-availability of Input Tax Credit (ITC) on GST paid on inputs since the output is kept outside the ambit of GST.

There are broadly two significant reasons why there is no GST on alcohol for human consumption:

1. The inflow of revenue for state government

Liquor constitutes a significant source of income for the states, on all counts. Further, the applicability of GST on alcohol for human consumption would have meant half of the revenue share going to the central government. Thus when the GST bill was drafted, the state governments were reluctant to give up on this significant revenue source. As a result, alcohol was exempted from GST to ensure a continued revenue inflow for the states.

2. To charge high tax rates

Tax rates applicable on liquor are comparatively higher than the rates listed down under the GST regime. Thus, the second major reason for excluding alcohol from GST was to keep the prices high by charging high tax rates to limit consumption.

The GST on the liquor industry is both direct and indirect. Let’s understand how:

1. The direct impact of GST rates on the liquor industry

Liquor for human consumption attracts the old taxation regime; however, industrial alcohol falls within the scope of GST and is chargeable at a tax rate of 18%. Further, Ethyl alcohol and other spirits, denatured, of any strength shall also fall under GST and will be taxed at 18%.

2. Debatable issue:

A derivative of sugarcane molasses, ENA is used as a raw material in liquor production after considerable processing and dilution. ENA is also used in manufacturing cough syrups. Thus, the pharmaceutical sector raised their pressing demand regarding the inclusion of ENA in the GST to avail of Input Tax Credit (ITC) for the same. However, the state held its stand, stating it would be difficult for them to keep track of alcohol production if ENA is brought within the scope of GST.

Also Read: Whisky Brands in India

The indirect impact of GST on the liquor industry

Although GST is not applicable on liquor meant for human consumption, its implementation has led to a rise in the price of alcohol. Since the output is subject to Excise duty and VAT, the inputs attract GST. Earlier, the tax charged on input materials remained somewhere between 12% to 15%. But with GST, inputs began to be taxed at 18%, majorly for which no ITC is available, which led to a rise in the cost of manufacturing. This additional cost is further passed on to the consumers leading to the total increase in liquor prices.

Further, even the GST paid on freight and transportation of liquor is another cause impacting liquor costing. Earlier, freight attracted 15% service tax. However, post-GST, they are taxed at 18%. Since the output is outside the ambit of GST, no ITC can be claimed for the tax paid on freight. This further forms part of the cost of the product, leading to a rise in the prices of output.

Some notable effects of exclusion of alcoholic beverages from GST:

• Tax cascading - impacts the prices, volume, and growth of the sector
• Distortion of credit chain - affects the trade
• Multiple regulations - leads to increased complexities

Conclusion

The liquor sector is particularly highly regulated in India regarding its sale, storage, marketing, and distribution. The GST on the liquor industry has been significant. However, still, the alcohol beverages sector has been somewhat overlooked in GST due to political concerns. Certain debatable issues still exist, a prominent one being, “Whether or not alcohol for human consumtion should be brought under the ambit of GST.” The law is still a work in progress and has a long way to go.

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FAQs

Q. Is GST applicable on liquor?

Ans. During the present times, liquor for human consumption is outside the purview of GST. However, alcohol for industrial purposes falls under GST.

Q. Why is liquor kept out of GST?

Ans. Currently, liquor meant for human consumption is kept outside the purview of GST, and a constitutional amendment will be required to bring it under GST. However, the alcohol sector is one of the dominant contributors to state revenue, so state governments are unwilling to give up on it.

Q. Will the prices of imported drinks increase in 2021?

Ans. In the budget 2021, the finance minister, Nirmala Sitharaman, imposed a new cess of 100% on imported alcoholic products, including Brandy, Whisky, Scotch, etc. Further, the basic customs duty has been reduced to 50%.

Q. What is the GST rate on liquor?

Ans. Liquor other than liquor meant for human consumption is chargeable at a GST rate of 18%. It also includes ethyl alcohol and other spirits, denatured, of any strength. Furthermore, any beverage of which no classification is provided is also taxed at 18% GST.

Q. How can liquor be included in the GST?

Ans. The inclusion of liquor in GST can only be possible through:

• A constitutional amendment
• Change in definition of “Goods” as defined under the GST Act
• Change in rules regarding levy and collection of tax