Alcohol out of GST for now, but beer will still get costlier

Liquor has been kept outside the goods and services tax ( GST) for now as it requires a constitutional amendment to bring it under the ambit of the new tax regime. However, there are expectations that the decision can impact the sector negatively.

Share prices of liquor companies have already plunged up to 6 per cent in the past four sessions with IFB Agro Industries falling the most at 6.4 per cent, followed by Global Spirits (down 5 per cent), Ravikumar Distillaries (down 5 per cent), United Breweries (down 5 per cent), Mount Shivalik (down 2.5 per cent) and Winsome Breweries (down 1.40 per cent).

Edelweiss Securities believes the sector will be impacted negatively unless the government works out an alternative mechanism to permit refund of irrecoverable taxes. Further, more clarity is awaited regarding the taxation of inputs (ENA) under GST.

Despite alcohol remaining out of GST, there are expectations that its implementation can increase the cost of beer.

In an exclusive chat with ET Now, Shekhar Ramamurthy, MD, United Breweries, said the big impact of GST will be on beer, as output is out of the GST but input is fully in.

“We have to register ourselves with GST at each and every location we operate in. Our input materials at present attract excise duty, sales tax, VAT at between 12 per cent and 15 per cent, whereas under GST, this is likely to be at 18 per cent. So, there is a clear increase in tax on most of input materials by between 3 per cent and 6 per cent,” Ramamurthy said.

With the increase in cost, there are expectations that beer manufacturing companies will pass on the extra cost to customers.

Ramamurthy said the industry operates with second-hand bottles. Under the current tax regime, second-hand bottles are not subject to excise duty, because they do not pass through factory gates, second, third, fourth, fifth time, they only incur local sales tax. Now, this is an issue the industry is discussing with the GST Council.

Ramamurthy said the industry is hopeful that the council will take a more pragmatic view, because it impacts not just those who use second-hand bottles but also a lot of other industries who deal in used goods.

If second-hand bottles are taxed at full GST rate, once again the tax impact on the bottles would go from 5-6 per cent at present to 12-18 per cent.

The third big bucket that impacts the industry is freight.

“Today freight is subject to service tax at full 15 per cent, what it is now. Tomorrow it will become 18 per cent. There is a big impact. We estimate that the impact on United Breweries could be anything between Rs 100-160 crore depending on how it pans out,” he said.