Liquor companies producing sanitisers to bear GST brunt

Now many alcoholic beverage companies in India are engaged in the
production of sanitisers. But sanitiser as a product cannot be technically
called alco-beverage and is subject to levy of GST. This raises a new
worries for the liquor industry. Are companies prepared for it?

The nationwide lockdown is continuing in India since the outset of 25th March 2020 and may continue in the near future. During the lockdown period in India, both the production & sale of alco-beverages are totally suspended. Further, in all the states of India, since lockdown in this fiscal (FY 2020-21) licences could not be renewed or granted, preventing a major cash inflow for state governments, seriously affecting governments’ major tax revenue.

What these distilleries and bottlers have been doing then in lockdown? It is a fact that ‘sanitisers’ have become an essential item in our daily routine and has become a product of mass consumption. It is also a fact that because of the spread of Coronavirus, the consumption of sanitisers has skyrocketed. The major raw material or ingredient of sanitiser is alcohol. The health advisory also suggests that a desirable sanitiser should contain 65 percent of alcohol. So it is natural that a great many of alcobeverage producers in India are now producing sanitisers in bulk, in public interest to cater to its heightened demand.

The Dilemma

Now comes the dilemma for India’s alco-beverage sector. Presently, w.e.f. 1.7.2017, the output supply (alcoholic beverages meant for human consumption) is outside the ambit of Goods and Services Tax (GST), implying that there is no levy of GST on such products. These products continue to be liable to Value Added Tax (VAT) and state excise duty. On the other hand, they suffer on account of no input tax credit of GST paid on various inputs and input services; adding to cost as there is tax cascading.

Now when these alcoholic beverage produting units are manufacturing ‘sanitiser’, such a product cannot be technically called alco-beverage and is subject to levy of GST. This is also not a medical supply.

Hand sanitisers (HSN classification 3808.94) are taxable at the rate of 18 percent in India (9 percent CGST, 9 percent SGST). Other disinfectant preparations including alcohol solution are also taxable at 18 percent under GST.

Though there is a demand to exempt sanitisers from the levy of GST, the Government has not accepted such demand and rightly so. If exemption is provided, then companies manufacturing these products will not be able to reap the benefits of input tax credit and consequent tax efficiency.

Cost Competitiveness

Their products will not be cost competitive and such exemption will be counter-productive. As such, exemption from GST may not sound to be a good proposition in view of the broken value chain. This will also make imported sanitisers cheaper as compared to their domestic counterparts.

Now, given the fact that sanitisers are taxable at 18 percent GST, all alco-beverage companies in the country manufacturing ‘sanitisers’ for the time being or for a short to medium term in future will have a GST output supply on which they will be entitled to input tax credit. This implies that they will have to pay GST on inputs as well as on outward supplies. Such companies should be aware of this and ensure all GST related compliances including registration, amendment in registration (if any), issuance of a tax invoice, taking note of input tax costs, taxes and invoices, filing of returns and availing and utilising of input tax credit.

Given the scenario that India will have considerable consumption of sanitisers in the future, many companies may decide to manufacture sanitisers in future and even decide a change in product mix.

Like everyone says, life post Corona will change. This may happen for companies engaged in producing sanitisers too.