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 compl
iances. 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 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. The definitions of turnover and of sale may change. Some accounting issues may also crop up in the post-GST scenario. 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.