‘Alcohol going to be taxed more’
I P Suresh Menon – Adviser-Tax & Regulatory Affairs at USL
(Chairperson of the session)
It is generally believed that GST is going to be good for the country. True, there is no doubt about that. The question is whether the GST as proposed will be implemented? With regard to implementation, it is said GST is not flawless but more of a flawed one. The reason is some constitutional exclusions which seem to be illogical, given the larger objective of the nation’s economic progress. The four notable exclusions are: petroleum, and gas, real estate and alcohol.
As the proposed law stands today, common market is a distant goal. About 51% of the taxable base is excluded from GST and its obvious consequence is that tax rates are going to be high.
Going against the much advertised objective of “one nation, one market, one tax”, what is proposed is not one nation-wide GST. There is a central GST and a state GST and the two will not talk to each other! Even today central excise duty and state VAT don’t talk to each other. So, what would be the difference after GST implementation?
Alcohol out of GST is a myth. Because while the finished alcoholic product is out of GST, the inputs of the alcoholic product, both goods and services, are going to be subjected to GST. For example, molasses, grain, bulk spirit, and Scotch, if transferred from one factory to another, would be subject to GST because GST has taken away the whole concept of production and sale. It is now a concept of supply which means stock transfers would be subject to GST.
In all likelihood, the new tax rates, applicable to goods and services, used in the spirits industry would be higher than the present ones. Already duties and taxes on alcobev products are multiple in various states. Cold drinks invite about 25% taxes on their ex-factory price but in the case of alcoholic products, taxes amount to 500-600% of the ex-factory price.
The additional taxation post-GST is going to have a multiplier effect on the end consumer price. That is going to affect the demand for alcoholic products and government revenues. People are not likely to stop drinking but step down the value chain – from premium whisky to something priced lower. People at the bottom of the chain would probably slip down to country liquor. If there is no country liquor, people may slip to the illicit or spurious liquor. So, these are the risks of alcohol being out of GST.
Opposed to the common tax rate which we find in many countries, in India we will end up with six tax brackets for different products. Classification of a product will be an issue, leading to litigation. The situation would be no different from what it is today.
Agricultural inputs are proposed to be excluded from GST but how far down the value chain would agricultural inputs continue to be excluded, we still do not know.
Let’s take a look at the GST impact on raw materials. Today extra neutral alcohol (ENA) manufacture from molasses or grain is not subject to any excise duty but VAT. But ENA is
likely to be taxed in future. Similarly tax on freight from the present 4.5% may go up to 12%. And, this 12% will be the extra cost of those goods and agricultural produce which are
out of GST.
The GST regime is also going to adversely affect recycling of beer bottles. Every beer bottle is recycled 7-8 times. On the first recycle you pay 14-14.5% excise duty and sales tax. Every
time you recycle you pay between 4-5% local VAT. But under GST, the rate is going to be 18%, a huge jump from 4-5%. You can’t even leave those bottles behind because somebody will fill the bottles with some spurious stuff and sell it in your genuine bottle. Same is the case with spirits.
About 75% of the market is in government hands. As price increases don’t come easy, post GST we are going to end up with reduced margins. Even if you succeed in jacking up prices, you may end up with diminishing demand, leaving the space for illicit and spurious liquor manufacturers to flourish.
We have requested the government to look at the possibility of adjusting our enhanced taxation against state duties and taxes or refund it cash. In countries like Australia and Malaysia, refunds and adjustments are provided for products which are not covered by GST.
‘GST to devour tax setoff of liquor industry’
Dr. Sanjiv Agarwal, Managing Partner, Agarwal Sanjiv & Company Chartered Accountants, Jaipur
The liquor industry is a highly regulated and heavily taxed industry. But it has a good market share. While alcoholic beverages represent 25% of the F&B market in China and the US, in India their share is 34%, the largest in F&B market. For most states in India, alcohol contributes about 20 to 25% of the state tax revenue. And, it is the second largest contributor of the state revenue after petroleum, giving more than Rs 90,000 crores in taxes every year. The total tax impact for liquor companies ranges from 70-150% in most states as no set-offs are available.
Goods and services tax (GST) means any tax on supply of goods or services. GST is a move from origin-based tax to destination-based tax. GST is not a tax on manufacture of good/service. It is a supply or consumption tax. The place of consumption of a good/ service decides the state that will collect GST. In other words, the producing/selling state gets nothing while the consuming state receives complete share of revenue.
Today only states can levy taxes on liquor beverages. This is a major reason why the liquor industry is not part of GST. No state wants to be stripped of its power of levying taxes on the liquor industry.
In the post-GST scenario, states will levy tax on the inter-state movement of liquor products. But for their intra-state trading, the centre will levy tax. So even under the GST regime, the liquor industry has to live with State excise, VAT and CST (Central Sales Tax).
GST comprises three types of taxes – State GST, Central GST and Integrated GST (IGST). None of these taxes can be levied on the liquor industry by the Centre or State. So instead of IGST they will continue with CST.
Service tax is also part of GST and cannot be levied on the liquor industry. Eventually, states will levy a higher rate of tax on liquor products because service tax will not be there. The taxes levied by local bodies, like octroi, are not going to be subsumed in GST hence will be applicable to the liquor industry.
Virtually, there will not be any tax setoff for services expenses and various regulatory fees like the licensing fee. In nutshell, 90% of the inputs of the liquor industry will not get any tax setoff. Only certain state taxes will get setoff. Consequently, the cost of production and market prices will go up, adversely affecting the sale and marketing of liquor products. Because of heavy taxation there may be no incentive for FDI to come into the liquor industry. There will also be inefficiency in the production and distribution aspects of the liquor industry supply chain. The FMCG sector will be benefited in terms of logistics and other supply chain advantages which are not available to the liquor industry.
Following the implementation of GST, service providers and vendors will have to adhere to dual compliances. They will have to comply with GST provisions as well as state provisions. For example, the hotel industry will be subjected to GST for their output but their inputs in the form of liquor will be subject to state taxes. As there will be not set-off for their liquor purchase, their output services will be costlier.
Every company is going to spend a lot on compliances, required under GST, as they would require professional services for doing compliance. Compliance is also going to become a governance issue because the GST law has a provision for compliance rating by the government. If you don’t undertake GST compliances, then the cost of non-compliance
is too high in terms of penalty. Compliances will have to be done for both – GST law as well as State tax laws.
The bottles and caps used in products of these sectors are part of GST but not the final product. The manufacturers who will be paying GST to the bottle and cap manufacturers will not be getting any tax setoff, hence their cost of production and market price will go up. Due to alcohol’s exclusion from GST, cost of production will also rise in the pharmaceutical and perfume sectors for which alcohol is an input.
GST would also necessitate reviewing the existing business models. At present the industry follows different models like manufacturing, taking distillery on lease, bottling on contract,
franchising and the IPR arrangement. In the manufacturing model, we pay state excise duty. In case of IPR, franchise and distillery lease models, we pay service tax. But as service tax is getting subsumed into GST, this requires reviewing industry business models. Business verticals can be created to ensure that maximum tax credit on inputs is taken.
When the country moves into the GST regime, there are going to be major changes in VAT laws also. Today, supply is not recognized in accounting and company law. Either you have a production or a sale, supply is not an accounting item. The Institute of Chartered Accountants of India will also have to revise accounting standards to ensure that the financial statements can be prepared on the basis of supply.