State Can Tax Industrial Alcohol - Jurishour No. 1 Latest

The Supreme Court has upheld the State’s Regulatory Power over the production, manufacture and supply of industrial alcohol and can tax industrial Alcohol.

The bench of 9 Judge Bench of CJI DY Chandrachud, Justice Hrishikesh Roy, Justice Abhay S. Oka, Justice B.V. Nagarathna, Justice J.B. Pardiwala, Justice Manoj Misra, Justice Ujjal Bhuyan, Justice Satish Chandra Sharma And Justice Augustine George Masih has overturned a seven-judge bench verdict and held that states have regulatory power over production, manufacture and supply of industrial alcohol.

Background

“Intoxicating liquor” falls within the legislative domain of the State Legislatures under Entry 8 of the State list, List II, of the Seventh Schedule to the Constitution. The issues which arise for adjudication in this reference pertain to the scope of the power of the State Legislatures under Entry 8 and the meaning of the phrase “intoxicating liquor”.

The question is whether “intoxicating liquor” in Entry 8 only includes potable alcohol, such as alcoholic beverages or also includes alcohol which is used in the production of other products. In Synthetics and Chemicals Ltd. v/s. State of UP, a seven-Judge Bench delineated the scope of the regulatory powers of State Legislatures on “intoxicating liquor”. The correctness of Synthetics has been referred to a larger bench.

Constitutional Provisions

The State has the legislative competence under Entry 24 of List II over ‘industries’ but this is subject to entries 7 and 52 of List I. Under Entry 52 of List I, Parliament has legislative competence over such industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest.

Entry 7 of List I deals with industries which are declared by Parliament by law to be necessary for the purpose of defence or for the prosecution of war.4 Under Entry 33 of List III, the State Legislatures and Parliament can legislate on trade and commerce in, and the production, supply and distribution of the products of industries controlled by Parliament under Entry 52 of List I.

Entry 8 of List II deals with ‘intoxicating liquors’.These words are followed by the expression “that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors”. The Seventh Schedule also demarcates taxing powers related to alcohol separately.

Entry 84 of List I (before it was amended by the Constitution (One Hundred and First Amendment) Act 2016) enabled Parliament to levy duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption but including medicinal and toilet preparations containing alcohol. Entry 51 of List II confers the State Legislature the competence to levy duties of excise, inter alia, on alcoholic liquors for human consumption but not including medicinal and toilet preparations containing alcohol.

Court’s Observation On Earlier Occasions As To State’s Power To Tax Industrial Alcohol

The court stated that the phrase ‘intoxicating liquor’ in Entry 8 means ‘liquor which is consumable by human being as it is” for the various reasons.

Firstly, in FN Balsara case, the Court was not aware of the full use of alcohol as industrial alcohol.

Secondly, only two decisions of this Court have dealt with industrial alcohol. One was the decision in Synthetics (2J) case and the other was the decision in Indian Mica and Micancite Industries v. State of Bihar in which this Court held that Parliament had the legislative competence to levy tax on alcoholic liquor not fit for human consumption.

The court held that the provisions that are challenged are not regulatory but seek to levy a tax. List II does not confer the State Legislature the power to levy a tax on industrial alcohol.

The court in the Synthetics (2J) case has held that the power of the States to legislate on the subject of alcohol is restricted to laws which charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol. States do not have the competence to levy tax on industrial alcohol. States have the competence to levy tax on potable alcohol.

Justice Oza in his concurring opinion held the legislative entries in List I and List II clearly demarcate the taxing powers of Parliament and State Legislature. Entry 84 of List I covers levy of excise duty on alcoholic liquor for other than human consumption and Entry 51 of List II covers levy of excise duty on alcoholic liquor for human consumption.

Relevant Provisions – Tax Industrial Alcohol

This interpretation would become clearer on a reading of Entry 33(a) – List III which deals with, inter alia, trade and commerce in, and the production, supply and distribution of the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and also includes imported goods of the same kind as such products.

Therefore, if products of any industry where the control of such industry by the Union has been declared by Parliament by law to be expedient in public interest are manufactured in India or imported into India, then as per Entry 33(a) – List III, on the production, supply and distribution of and trade and commerce of such industrial products, the State Legislature would not have any exclusive power to pass a law under Entries 26 and 27 – List II as they are subject to Entry 33(a) – List III.

In other words, in view of the passing of the IDRA, under Entry 52 – List I and the inclusion of, inter alia, products of “Fermentation Industries” such as “industrial alcohol” in Item 26 of the First Schedule of the IDRA, the State Legislatures would be subject to the powers of the Parliament to pass a law in the matter of production, supply, distribution, trade and commerce of such industrial product.

Conclusion – State Can Tax Industrial Alcohol

The court has held that the members of the Constituent Assembly were clear in what they envisaged within the scope and ambit of the expression “intoxicating liquors” in Entry 8 – List II. This is also evident from Item 26 of the First Schedule of the IDRA. “Intoxicating liquors” is only a segment of the “Fermentation Industries”, namely, potable alcohol. There was no intention on the part of the members of the Constituent Assembly to read within the “intoxicating liquor” non-potable or “industrial alochohol”.

The court held tha in order to have a consistency between what was envisaged under Entry 84 – List I and Entry 51 – List II in the context of alcoholic liquors for human consumption, the taxing Entry in List II which is within the legislative competence of the States follows the regulatory Entry in Entry 8 – List II. Therefore, the use of the expression “industrial alcohol” or non-potable alcohol in Synthetics and Chemicals (7J) was only to crystallise all variants of alcohol which were non-potable and to distinguish the same from potable alcohol meant only for human consumption as a beverage.