GST Relief On ENA, Tax Cut On Molasses Unlikely To Alter Liquor Prices

The GST Council's decision to exempt extra neutral alcohol, a key ingredient used to manufacture alcohol for human consumption, from the levy and giving states the exclusive right to tax the item is a 'sentimental' positive news for alcohol spirits makers and has little financial impact. It will also not really alter the sticker prices on liquor, according to industry executives.

"The decision brings finality to an issue that has been hanging fire for six plus years since GST came into being," Suresh Menon, secretary-general of the International Spirits and Wines Association of India, told BQ Prime.

The association, which represents large foreign liquor companies in India such as Bacardi, Diageo, Moet Hennessy, Pernod Ricard, said the possibility of an increase in taxes if the essential ingredient in the manufacture of alcoholic spirits were to be taxed to GST, thereby pushing up the prices of the end alcoholic beverage, now falls away, and is very welcome.

"The alcoholic spirits industry has been making the case for continuing to keep the taxation of this item within the taxing domain of the states, as had been the practice pre-GST," Menon said.

Most state levies VAT on ENA which companies are able to off-set against the VAT on output product. ENA is governed by 2% central sales tax on inter-state sales instead of the 18% integrated GST. This tax is already factored into the prices of liquor.

Himanshu Shah, vice-president, research analyst at Dolat Capital Market Pvt. also said: "The decisions shall have nil financial impact on the alcoholic beverage players viz. United Spirits Ltd., Globus Spirits Ltd., etc., as no states were levying GST on ENA so far."

A few states were contemplating that GST is applicable on ENA and thus were raising demand to tax the item. The Allahabad High Court, for instance, allowed Uttar Pradesh to levy GST on ENA at 18%. 

"In the absence of clarity from the GST Council, the Courts have taken conflicting positions on the matter which further compounded the uncertainties," said Vinod Giri, director general, Confederation of Indian Alcoholic Beverage Companies. "Considering that, the Council’s decision is a big relief to the industry, it will bring stability and settle nerves all over."

"Had GST council recommended GST on ENA (either retrospective or prospective basis) it would have been major negative," said Dolat Capital's Shah, adding that the latest decision removes the major overhang for the industry and thus is a 'sentimental' major positive.

The Council has also reduced the tax rate on molasses, a by-product of sugarcane and used as raw material for alcohol production, to 5% from 28% earlier.

"This progressive decision will be beneficial for the entire value chain including the farmer and it will also enable industry to mitigate some of the cost pressures," said Alok Gupta, managing director, Allied Blenders and Distillers.

The GST reduction will bring down the costs of molasses-based ENA and thus benefit country liquor players in UP like Radico Khaitan, said Shah.

On account of the Allahabad HC ruling, the GST on Molasses and grain-based ENA in UP was 18%. "AlcoBev players used to procure ENA from outside UP (bearing export/import tax as well as transportation) and still had lower landed costs for ENA then procuring from within UP," said Shah.

The removal of GST on ENA, will have a minor positive for Radico Khaitan Ltd. Radico Khaitan would now be able to significantly increase the captive consumption by supplying ENA from UP to its tie-up units in other states at lower costs with better end-to-end control on quality of ENA and save on GST on ENA already sent from UP to other states for premium products, Shah said, adding it may lead to Rs 30 crore benefit for Radico Khaitan.

ISWAI, too, believes that the tax cut on molasses should make for a level playing field for distillers of both grain and molasses.

Ideally, the industry would have liked all of alcohol including the finished product be under GST to bring parity in taxation across states, Giri said.