Taxation of Alcoholic Beverages: Why They Remain Outside GST's Scope
In India, alcoholic beverages for human consumption are intentionally excluded from the Goods and Services Tax (GST) framework, primarily to ensure state revenue and control consumption. Despite this exclusion, liquor prices have risen due to increased GST on manufacturing inputs and transportation costs, which were previously taxed under VAT and service tax. States have diverse approaches to taxing and regulating alcohol, with some implementing prohibition and others generating significant revenue from its trade. The industry largely favors including beer under GST to streamline costs and potentially boost tourism.
While alcoholic beverages do not fall under the Goods and Services Tax (GST) in India, they are subject to various other taxes. Globally, governments impose taxes and regulations on liquor sales, which, combined with local licensing costs and state controls, often lead consumers to pay significantly more than the production cost.
Key Points:
- Alcohol intended for human consumption is exempt from GST, meaning no GST is applied to its sale.
- Certain components used in producing alcoholic drinks, such as malt and various food additives, are subject to GST.
- As of November 1, 2024, Extra Neutral Alcohol (ENA) utilized in manufacturing alcoholic beverages for human consumption is also outside the purview of Central GST (CGST), with corresponding amendments to IGST and SGST Acts.
State-wise Taxation of Alcohol
Across India, 29 states and seven union territories implement distinct strategies for alcohol taxation and regulation. For example, Gujarat has maintained a complete prohibition on liquor trade and consumption since 1961. Conversely, Puducherry, located on the Coromandel Coast, derives a substantial portion of its revenue from alcohol sales. Some states opt to auction retail and wholesale licenses, while others establish state monopolies. Tamil Nadu operates such a monopoly, employing over 30,000 individuals and managing more than 6,000 outlets.
Alcoholic Beverage Taxation
Despite alcoholic beverages not being included under the Goods and Services Tax (GST) framework, they are subject to other taxes that contribute to their elevated retail prices. These include:
- Excise Duty
- Value Added Tax (VAT)
GST Application to Alcohol
Alcoholic beverages have been intentionally kept outside the GST framework for two primary reasons:
- To guarantee a consistent and substantial revenue stream for state governments, separate from their GST allocations. It is estimated that liquor and beer taxes generate approximately INR 90,000 crores annually for state coffers.
- To maintain high prices for alcoholic drinks, thereby discouraging excessive consumption.
Nevertheless, specific components utilized in alcohol production are subject to GST. Essential ingredients such as malt and various food additives saw their GST rate adjusted to 5% following the 56th GST Council meeting and related GST notifications. Furthermore, the Union Budget 2024, effective November 1, 2024, amended Section 9 to exempt Extra Neutral Alcohol (ENA) used in human-consumable alcoholic beverages from Central GST (CGST). Corresponding amendments were also made to the IGST and SGST Acts.
Factors Influencing Liquor Prices
Despite the absence of GST on alcohol, liquor prices have continued to increase since the implementation of the Goods and Services Tax. This phenomenon is primarily attributed to the higher taxation on manufacturing inputs. Before GST, these inputs were taxed at 12-15% under the VAT system.
With the introduction of GST, most raw materials now face an 18% GST, leading to elevated input costs. These increased costs are subsequently transferred to consumers. Another contributing factor to the sharp rise in liquor prices is the application of GST to transportation and freight services. Previously, these services incurred a service tax of approximately 15%; however, under GST, they are taxed at 18%. Consequently, even without significant alterations to the VAT rates on beer or liquor, the overall cost has risen due to increased input taxes.
Industry Perspective
The alcoholic beverage industry largely disapproves of the government's decision to exempt alcohol from GST. This exemption has inadvertently increased overall costs due to higher taxes on manufacturing inputs.
Since the final product is tax-exempt, manufacturers must pay input taxes on materials and then seek refunds for accumulated Input Tax Credit (ITC). This lengthy process prolongs the working capital cycle for businesses. Many in the industry argue that excluding beer, which typically has only 5% alcohol by volume, from the GST regime is illogical. A common sentiment among industry professionals is that including beer under GST would significantly boost the burgeoning tourism sector.