SC Expands States' Power to Tax Industrial Alcohol

What’s in today’s article?

• Why in News?
• Background of the Dispute of Taxing Industrial Alcohol
• The SC’s Verdict on Taxing Industrial Alcohol
• Implications of SC’s Verdict on Taxing Industrial Alcohol

Why in News?

• A nine-judge Bench of the Supreme Court of India (SC), in an 8:1 decision, ruled that states have the authority to impose taxes not only on alcoholic beverages but also on 'industrial' alcohol.
• This decision expands states' revenue-generating capabilities, with significant implications for both taxation and federalism.

Background of the Dispute of Taxing Industrial Alcohol:

• Background:
• Why is the taxation of industrial alcohol controversial?
  • Overlapping constitutional entries:
    • The dispute involved two entries in the Seventh Schedule of the Constitution.
    • Entry 8 of List II(State List) gives states authority over intoxicating liquors, while Entry 52 of List I (Union List) grant the Centre the power to regulate industries.
    • Additionally, Entry 33 of List III (Concurrent List) grants the Centre authority over any industry that Parliament has legally determined to be in the public interest.
  • Centre claims its jurisdiction:
    • According to the central government, industrial alcohol falls under its jurisdiction due to its inclusion in the Industries (Development and Regulation) Act, 1951.
    • The Act was passed by Parliament under the above two heads of the Union and Concurrent Lists.

The SC’s Verdict on Taxing Industrial Alcohol:

• The main question before the court:
  • The court's primary concern was whether the term "intoxicating liquor" could also encompass "industrial alcohol."
  • States argued that they should regulate industrial alcohol, given its potential misuse in creating illegal consumable alcohol.
• Majority opinion:
  • The majority, led by Chief Justice of India (CJI) D Y Chandrachud, along with eight other justices, ruled in favour of the states.
  • They reasoned that the term “intoxicating liquor” under Entry 8 of List II (State List) should be interpreted broadly, covering everything from the production of raw materials to consumption.
  • The court affirmed that states have the power to tax both alcoholic beverages and industrial alcohol, which can produce intoxication or pose health risks.
  • The court disagreed with the Centre’s argument that industrial alcohol falls under its jurisdiction due to its inclusion in the 1951 Act.
• Dissenting opinion:
  • Justice B V Nagarathna dissented, arguing that the Centre should retain control over industrial alcohol.
  • She maintained that industrial alcohol, by its nature, should not fall under the definition of intoxicating liquor, despite its potential misuse.
  • In her view, the Centre's control over industries, as outlined in the 1951 Act, should prevent states from regulating industrial alcohol.

Implications of SC’s Verdict on Taxing Industrial Alcohol:

• Overturned a previous judgement:
  • The majority ruling overturned the SC's 1990 judgement in Synthetics & Chemicals Ltd vs State of Uttar Pradesh, which had held that states could not tax industrial alcohol.
  • The latest decision affirms that states have the legislative competence to regulate and tax industrial alcohol, even though it is non-potable.
• Impact on States' revenue:
  • The court’s decision significantly impacts state revenues, with alcohol taxation already being a major source of income.
  • For example, Karnataka raised its Additional Excise Duty (AED) on Indian-made liquor by 20% in 2023.
  • The ruling reaffirms states' ability to control this critical revenue stream.
• Federal balance and Centre-State relations:
  • The ruling addressed the delicate balance between state and central powers.
  • The majority emphasised that, when constitutional entries overlap, the interpretation that preserves federal balance should prevail.
  • In this case, giving states the power over industrial alcohol aligns with maintaining that balance, avoiding redundancy in constitutional provisions.
  • This decision follows a similar 8:1 majority ruling (in July 2024), which upheld states' authority to levy royalties on mineral extraction and tax the lands where mines are located.

Q.1. How does the seventh schedule of the Indian Constitution ensure federal balance?

The Seventh Schedule of the Indian Constitution ensures federal balance by dividing powers between the Union and State governments, and by providing a clear separation of powers between the center and states.

Q.2. What is the Industries (Development and Regulation) Act, 1951?

The Industries (Development and Regulation) Act 1951 controls the activities, performance and results of industrial undertakings in the public interest.

News: States have legislative say over all alcohol, including industrial, SC rules 8-1 | IE | IE