GST Council meet: Council has ceded the right to tax extra neutral alcohol to states, says FM Sitharaman

The Goods and Services Tax (GST) Council on Saturday has decided to delegate the taxation of Extra Neutral Alcohol (ENA) to the states, FM Nirmala Sitharaman said after the meeting. The council also agreed to exempt ENA from VAT when supplied for industrial purposes.

FM Nirmala Sitharaman said the council also decided to exempt distilled alcohol for human consumption from the indirect tax, but said ENA for industrial use will continue to attract Goods and Services Tax (GST).

Speaking about the matter, FM Nirmala Sitharaman said: "GST Council today has ceded that right to tax ENA to the states. If the states want to tax it, they are welcome to do it. If the states want to leave it, they are welcome to take a call on it. The GST Council is not taking a call to tax it, although the right to tax lies here. So in the interest of the states, we have, if I may use the word ceded that right to the states."

ENA is a key component for many chemicals and is used not just in the manufacture of potable liquor but also for industrial and commercial purposes. ENA, also known as rectified spirit or rectified alcohol, is a high distillate alcohol, free from impurities, typically containing 95 per cent alcohol by volume. 

“ENA (potable alcohol) for human consumption will be exempt from GST and the same will be communicated to the Supreme Court," Chhattisgarh Deputy Chief Minister T S Singh Deo told reporters after the GST Council meeting.

Speaking on the levy, Ankur Gupta, Practice Leader - Indirect Tax at SW India, said: "Taxing the ENA for industrial use will increase the cost of production and by introducing a new levy it was important to explain the rationale behind it which is why Honble FM Ma'am gave the background on ENA and it's taxability. Also With GST council ceding the right to levy GST on ENA, we might also see some states imposing VAT on ENAs."

Kishore Kumar, Lead, Indirect Tax, Taxmann, said, "The GST in its 52th council meeting has proposed to keep Extra Neutral Alcohol (ENA) used for manufacture of alcoholic liquor for human consumption outside the ambit of GST. However, the ENA for industrial purpose will continue to attract GST at the rate of 18%."

Earlier, the Allahabad High Court had ruled that states do not have the right to impose tax on ENA for industrial use.

At the 43rd GST Council Meeting in 2021, it was decided to maintain the status quo on the taxability of ENA by allowing State Governments to continue levying VAT, but no official clarification was issued in this regard.

Before this, there were different practices across states, with some distilleries discharging GST on ENA and not paying Value-Added Tax (VAT) while some distilleries pay VAT on ENA and do not pay GST. There were a few who were paying 18 per cent GST on ENA cleared for the manufacture of ‘liquor for human consumption'.

Grant Thornton Bharat LLP, in a note, had said that the decision by the Allahabad HC opened a floodgate of questions for the manufacturers/suppliers of ENA across the country, who have been paying VAT/CST on the sale, and also the buyers, who have been availing credits of such VAT and setting it off against VAT payable on the sale of alcoholic beverages.

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