EXCISE DUTY - ECONOMY

News: Before SC’s 9-judge bench, question of whether states can levy excise duty on industrial alcohol

 

What's in the news?

       Excise duty levied on alcohol is a key component of a state’s revenue, with states often adding an additional excise duty on alcohol consumption to drive its income up.

       For example, in 2023, Karnataka hiked the Additional Excise Duty (AED) on Indian Made Liquor (IML) by 20%.

 

Excise Duty:

       Excise duty is a form of tax imposed on goods for their production, licensing and sale.

       It is an indirect tax paid to the Government of India by producers of goods.

 

Backdrop:

       Excise duty is the opposite of Customs duty in that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.

       At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.

       However, the Goods and Services Tax (GST), introduced in July 2017, subsumed many types of excise duty.

       Today, excise duty applies only on petroleum and liquor.

 

Excise Duty Levied on Alcohol:

       Excise duty levied on alcohol is a key component of a state’s revenue, with states often adding an additional excise duty on alcohol consumption to drive its income up.

       For example, in 2023, Karnataka hiked the Additional Excise Duty (AED) on Indian Made Liquor (IML) by 20%.

 

States and Industrial Alcohol:

       Industrial alcohol is used as a raw material to create other products, and is not meant for human consumption.

 

Can States Levy Excise Duty on Industrial Alcohol?

       A 9-judge Bench of the Supreme Court hearing arguments on whether state governments have the power to regulate and control the sale, distribution, pricing and other factors relating to industrial alcohol.

       Entry 8 in the State List under the Seventh Schedule gives states the power to legislate on the production, manufacture, possession, transport, purchase and sale of intoxicating liquors.

       At the same time, Entry 52 of the Union List, and Entry 33 of the Concurrent List mention industries, whose control is declared by Parliament by law to be expedient in public interest.

       Notably, subjects in the Concurrent List can be legislated upon by both states and the Centre, but where a central law exists, the state law cannot be repugnant to it.

       Industrial alcohol is listed in the Industries (Development and Regulation) Act, 1951 (IDRA).

 

Supreme Court and Industrial Alcohol Issue:

       In 1989, a 7-judge Constitution Bench in Synthetics & Chemicals Ltd v. State of Uttar Pradesh held that states’ powers, as per Entry 8 of the State List, were limited to regulating “intoxicating liquors” which are different from industrial alcohol.

       The SC acknowledged that states’ power to regulate consumable alcohol must include the power to “prevent and/ or check industrial alcohol being used as intoxicating or drinkable alcohol”.

       But the court found that the taxes and levies in question were designed primarily to increase the revenue collected by the state — not as measures to regulate the use of industrial alcohol, or prevent its conversion to drinkable alcohol.

       Essentially, the SC said that only the Centre can impose levies or taxes on industrial alcohol, which is not meant for human consumption.

 

 

Arguments Presented by the States:

       As per the arguments forwarded by States, the phrase intoxicating liquors in Entry 8 of the State List includes all liquids containing alcohol.

       Liquor, spirit, and intoxicant were used in excise laws before the Constitution came into force.

       The Union’s power under Entry 52 of the Union List also does not include control over finished products (such as industrial alcohol after the denaturation process).

       In order to exercise exclusive control over regulation of industrial alcohol, the Centre would first have to issue an order to that effect under Section 18-G of the IDRA. Without such an order, that control would vest with the states.

 

Types of Excise Duties:

       Before GST kicked in, there were three kinds of excise duties in India.

 

Basic Excise Duty:

       Basic excise duty is also known as the Central Value Added Tax (CENVAT).

       This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.

       This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

 

Additional Excise Duty:

       Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.

       This duty was levied on some special category of goods.

 

Special Excise Duty:

       This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.

       Presently the central excise duty comprises a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.