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The RFMLR Editorial Board recently interviewed Mr. Rajat Bose, Partner, Shardul Amarchand Mangaldas on the topic, "Dissecting Supreme Court Judgment Upholding Power Of States To Regulate Industrial Alcohol Under Term 'Intoxicating Liquor'"
Mr. Rajat Bose heads the Indirect Tax, Customs and Foreign Trade practice of Shardul Amarchand Mangaldas. At the firm, his focus is on tax planning, advisory and litigation support services in the area of Goods & Services Tax (GST), Customs, Excise, Value Added Tax Laws and Foreign Trade laws. He has been well recognized in the industry as one of the thought leaders on GST laws and has successfully advised various domestic and multinational client on implementation and transition issues relating to GST. He is also a part of various expert committees of business chambers on GST. Rajat has assisted various companies in making representation before the central and state governments including Central Board of Excise and Customs on various issues pertaining to interpretation, classification, exemptions, concessions etc. under the GST and other indirect tax laws.
With the judgment in State of U.P. vs. M/S. Lalta Prasad Vaish C.A. No. 000151 / 2007 & Other Connected Matters upholding state rights to tax alcohol, how do you see this intersecting with the GST regime? What implications could this have for state revenue and the broader fiscal landscape?
Answer: The Supreme Court upheld the power of states to regulate the diversion or misuse of potable or industrial spirits during the course of manufacture of industrial alcohol as it fell within the scope of Entry 8 of the State List. The majority has held that parliament lacked legislative competence to enact a law taking control of the industry of intoxicating liquor under the “public interest” provision in Entry 52 of the Union List.
Flowing from this, the states are now empowered to formulate legislation to regulate industrial alcohol. An important consequence can be the empowerment of states to now raise revenue by imposing regulatory fee.
The judgement also draws attention to fiscal federalism as the states in addition to gaining revenue from such regulatory fees, can also legislate regulations to contain the manufacture of spurious alcohol using industrial alcohol to prevent health tragedies.
The intersection with the GST regime has to be understood in an overall economic context. With the introduction of GST, revenue for the states underwent a downtick to a certain extent. With this judgement, in addition to imposing excise duty on portable alcohol, states can now levy appropriate regulatory fees relating to industrial alcohol. This could help increase state revenue to make up some of the gap which currently exists in state revenues with the introduction of GST.
Given the recent judgment and the primacy of state regulation, what do you see as potential limitations on the Union government's ability to implement national policies, such as the National Biofuel Policy?
Answer: As in the Mineral Area Development Authority Judgement, the states have been given certain powers to regulate and introduce fiscal legislation in the state. The Union, however, argued on the practical need for Parliament to legislate on industrial alcohol and the dissenting judgement in Lalta Prasad takes note of the argument.
Union policies like the National Biofuel Policy will need the active cooperation of states to ensure that incentives, subsidies, etc. are adequately realized to all stakeholders. However, any limitation lies in reconciliation. If powers are to be reconciled between the Union and the State, in the spirit of cooperation, legislative supremacy must not be a determining factor, unless specific public interest is evident on the face of record.
Reconciliation cannot render one entry redundant. The Supreme Court held that since, Entry 52 is a general entry dealing with industry, it cannot override a specific or a special entry in the state list [Entry 8] which deals with a specific industry. These factors have to be taken into consideration so that union policy does not adversely encroach into specific industry laws over which states have jurisdiction. Also, union policy should not eclipse state development agendas and established economic and revenue strategy. Any encroachment would result in states rising up in litigation to claim their primacy and rights qua state law and policy.
Guidance must be taken from history. States have also complemented national policies by issuing state policies to implement the mechanics of national policy (like state SEZ policies to complement the SEZ Act and Rules). The same cooperation must be reflected in implementing national policy.
Justice Nagarathna, in her dissent, argued that 'industrial alcohol' should not be classified as 'intoxicating liquor' under Entry 8, List II, emphasizing its non-consumptive industrial intent. How do you view this interpretation, and do you believe it sets important precedents for regulating similar products that might be misused but aren’t designed for human consumption?
Answer: The dissent holds a “consumption-oriented meaning” was given to “intoxicating liquors.” This “consumption” was concerned only with direct consumption, the act of drinking. As the framers chose to phrase it as “intoxicating liquor”, the “contours of interpretation” must be concerned with just that, rather than the entire industry concerning alcohol. It was the right judicial principle to hold that states could not have control to regulate industrial alcohol, as intoxicating liquor referred only to the industry of potable liquor
These principles may apply to products like chemicals or solvents or drugs that are not intended for consumption but can be misused. There are specific laws that regulate these products aimed at preventing abuse without restricting their legitimate use. For example, the Drugs and Cosmetics Act, 1940 provides examples of how substances can be controlled based on their potential for abuse while allowing for their legitimate use in industry or healthcare.
The majority has also clarified that products that use alcohol, such as hand sanitisers, would not fall under the ambit of Entry 8, List II. The potential for misuse should not override the primary classification. Using the above analogy, the present legal landscape relating to similar products that might be misused, should not be affected, and the Union laws should prevail over any state authority to legislate. In fact, the dissenting note also records the need for industrial alcohol to be under the Union’s control.
Justice Nagarathna suggested that states may lack authority to tax Extra Neutral Alcohol (ENA) under Entry 51, List II, if it’s intended for industrial use. What are your thoughts on the potential implications of her reasoning on state tax policies for ENA and other similar substances?
Answer: The GST Council, in its 52nd meeting has recommended that ENA used for the manufacture of alcohol for human consumption be kept outside the purview of the GST. Undenatured ENA or rectified spirit used for manufacture of alcohol for human consumption is now outside the scope of levy and collection of GST with effect from 1 November 2024.
ENA taxation for industrial use could fall under the Union's purview (Entry 84, List I: Duties of Excise on goods manufactured or produced, except alcoholic liquors for human consumption).
As per Article 246(3) read with Entry 54 of the State List of the Constitution, the power to levy tax on the sale of alcoholic liquor for human consumption vests exclusively with the State. Similarly, Entry 51 of the State List empowers the State Government to levy excise duties on alcoholic liquor for human consumption. ENA, not for human consumption, would therefore be outside the state purview of legislation.
States taxing ENA for human consumption will also enable the availment of credit as the final product (alcohol) is also taxed by the states. So, a credit chain is now established within the state tax legislation for the alcohol industry.
The majority’s broad interpretation of 'intoxicating liquor' under Entry 8 to include any potentially harmful alcohol contrasts with Justice Nagarathna’s narrower view. How do you think this balance will affect states' regulatory authority over non-potable alcohols used in industry? What legal challenges might emerge between state public health powers and industrial interests?
Answer: State public health departments can seek stricter regulations on all types of alcohol in the interest of public health needs. However, if states start regulating all types of alcohol, industrial interests like cosmetic industry. medicinal / pharma industry may face challenges navigating such strict state industrial policy. This may lead to policy paralysis, higher compliance measures, increased costs, which could create a bottleneck for these industries. Potential challenges may arise from industry claiming regulatory overreach and restriction of free trade and commerce under Article 301 of the Constitution, which could increase litigation.
The treatment of permanent establishments, such as that of Hyatt International, presents unique challenges, especially when global entities incur losses.
How should India approach the taxation of such establishments to align with international tax principles, and how might these issues evolve with global tax norms?
Answer: Hyatt often operates hotels under management contracts where it does not own the property but manages it for a fee. This has PE exposure due to the nature of encompassing control exercised by Hyatt in the host country. The judgement in Hyatt International Southwest Asia Limited held that the profits attributable to PE may be taxed in the hands of a multinational entity even though the group has incurred losses at a global level
The approach should be to read along with international commentaries, country specific DTAA, model tax conventions, OECD commentary etc. to align to the global view. The UAE DTAA along with commentaries mandates that a PE is a separate and an independent center for the purpose of fiscal treatment and taxation. DTAA in question (UAE) is solely concerned with the profits or income attributable to the PE. The taxability of income earned by a PE is not even remotely linked to the overall operations of the enterprise of which it may be a part. If the position is not taken that the PE is to be taxed irrespective of the financial performance of the global group, the tax authorities would have the power to tax a PE even when it has incurred losses and the international group has incurred profits. Such an interpretation is not correct. Hence, the alignment with evolving OECD principles, global commentaries and relevant country specific DTAA is very important for the judicial approach to taxation.
Given the rapid evolution and increasing complexity of taxation law, how do you envision the field of taxation law 10 years from now?
Answer: The field of taxation laws is a dynamically evolving species. With the introduction of new facets and ideas globally, tax regulators will always seek to expand the tax net to include new goods and services and thereby increase inflow of government revenue. The power of analytical reasoning will become paramount to counter the different interpretations that may emerge from stakeholders, especially government officials, in order to achieve parity between trade and taxes. A scientific evolution is therefore key to keep pace with emerging taxation policy
What is your advice to young professionals and law students who aim to build a career in the field of Taxation Laws?
Answer: Question yourself, read the law, analyze the provisions against facts and find solutions.
Question yourself on tax implications on complex transactions. Given that traditional goods and services are being replaced by unique and non-conventional goods and services, it is most important to raise question of tax treatment of such non-conventional and unique goods and services. Critical and careful reading of legislation, commentary and judicial precedents are important keys to success. Develop analytical reasoning by keeping track of advancements in and evolution of global taxation. Argumentative skill to question status quo should also be a core development. Alignment of reasoning with their practical application in trade and business should also be a featured competency.
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