Industrial alcohol is the GST Council's unfinished federal business: States won the legal fight, but the 18% GST still applies

GST Council is a forum where Centre-state partnership is seen in full force. In the spirit of federalism, there is one issue that the council should decide on when it meets on Thursday: industrial alcohol.

Industrial alcohol and potable (drinkable) liquor are both made from rectified spirit, a concentrated spirit containing up to 95% alcohol. Rectified spirit is further processed, and its alcohol strength reduced - to up to 42.5% in the case of whisky, and lower depending on the beverage - to make it drinkable. When rectified spirit undergoes 'denaturation' - making it unfit for human consumption - it becomes industrial alcohol, a critical input for the pharma, chemical and cosmetic industries.

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GoI and states have long contested who has legislative competence over industrial alcohol, with confusion arising from overlapping jurisdictions under various lists of the Seventh Schedule.

Entry 52 of the Union List empowers GoI to regulate industries that Parliament declares to be of 'public interest'. Through Section 18-G of Industries (Development and Regulation) Act 1951, Parliament has vested the Union with the power to regulate specified products related to scheduled industries, primarily to ensure that such goods are sold at reasonable prices.

Entry 8 of the state list empowers a state to make laws relating to intoxicating liquors. Production, manufacture, possession, transport, purchase and sale of intoxicating liquors fall within the ambit of the states.

Entry 33 of the concurrent list, however, gives both the state and GoI the power to make laws on the products of any industry, even where Parliament has declared that the Union should assume control in the public interest.

This overlap has created confusion, with both GoI and states believing they have the power to regulate industrial alcohol. Litigation on the matter dates to 1956, when a 5-judge Constitution Bench of Supreme Court held that Parliament's intent behind Section 18-G did not bar a state from exercising its powers to legislate on matters under Entry 33 of the concurrent list. That case, however, related to sugarcane.

The matter travelled back and forth between the top court, Allahabad High Court and the UP government before reaching a 9-member Constitution Bench in 2024. The court upheld states' power to regulate industrial alcohol by a 9-8 majority. It held that 'intoxicating liquor', over which states have competence under Entry 8 of List 2 of the 7th Schedule, includes industrial alcohol.

In effect, this could have opened another source of revenue for states. Yet, despite the apex court's order, industrial alcohol continues to be under GST. It's classified under HSN Code 2207 and attracts 18% GST. How, then, should the matter be resolved going forward?

States should not rush to levy excise. The council must take cognisance of the top court's order and recommend that states be free to levy excise under their laws. GoI should ensure that this decision is implemented immediately.

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States should also take cognisance of the fact that the 18% GST levy was imposed with input tax credit (ITC). It is unlikely that they can put in place a mechanism to provide credit for taxes paid on inputs, all of which will remain within the GST regime. States should, therefore, fix an excise rate that broadly mimics the effective GST burden after ITC is availed.

States have lost what is their legitimate revenue was from Oct 23, 2024, the date of the Supreme Court order. GoI could consider proportionately distributing revenue collected from industrial alcohol to the manufacturing states concerned. That would be a magnanimous step, one that would strengthen Centre-state fiscal relations and build trust.

The writer is former chairman, Central Board of Indirect Taxes & Customs