Budget impact: Tax on liquor licence fee scrapped retrospectively

Many entities were served notices after the 15% tax was introduced in April 2016

Liquor shops, restaurants, hotels, and clubs serving liquor have got relief from service tax on the licence fee. 

The 2019-20 Budget has abolished the controversial and litigated service tax on the licence fee paid by these entities to states. The Finance Bill, 2019, has done away with the tax with retrospective effect from April 1, 2016, when it was imposed. The Bill is yet to be passed in Parliament.

After the tax was imposed in 2016, notices were sent to many liquor shops and those serving alcohol, by the tax officials. The tax remained in force till June 30, 2017 or before the goods and services tax (GST) was introduced,  but the notices sent by authorities continued to be disputed in courts.  

The tax created a lot of controversy and its validity was widely questioned. The tax rate stood at 15 per cent.

For instance, a notice was sent to a hotel in Gurugram on the issue. After that, hotel officials met tax officers a number of times and tried to convince them that the tax is not applicable legally, sources said. 

However, officers sent similar notices to 15-20 hotels in Gurugram, the sources said, adding that some of those hotels paid taxes, while others approached courts. 

Similar notices were also issued against hotels in Mumbai, Goa, Jaipur, Punjab, Gurugram, Faridabad, and Delhi. 

“The retrospective exemption on alcoholic liquor licence fee is pragmatic, as there is no element of service when these licences were issued by the state governments,” said Abhishek Rastogi, partner at Khaitan & Co, who is arguing these cases in courts. 

Kushal Mittal, additional managing director, BCL Industries Ltd, a Punjab-based distillery, oil and real estate conglomerate, said, “We had paid Rs 80 lakh for the liquor licence and received a notice over payment of service tax of about Rs 12 lakh. We objected to that and did not pay the amount. We also raised the matter with the Punjab government.” 

The tax used to be levied on the licence fee because the Union government believed that the states transferred its privilege to the business entities in exchange of the fee and thus provided service to these companies. 

For instance, a notice cited above stated that the activities of production, manufacture, possession, transport, purchase and sale of intoxicating liquors within Haryana was the exclusive privilege or monopoly of the state government, according to the Constitution. By issuing licences and collecting licence fee in relation to these activities, the state government is transferring the exclusive right or privilege of the state to the business entities. 

As the said service was provided by Haryana to the entity concerned, it should pay service tax, the notice added. 

Since the service is provided by the government, the tax liability was on the entities getting these services under reverse charge mechanism. Normally, service tax is paid by a service provider to the government. However, under the mechanism, the tax is paid by the service receivers. 

Rastogi said there was absence of quid pro quo, and hence applicability of tax on the licence fee paid to the government can be challenged. 

A tax consultant said tax officers didn’t agree with representation and submission and owners of a hotel in Haryana were coerced to pay the tax. 

Rajat Mohan, partner, AMRG Associates, said, “With this balanced amendment, coercive steps against the taxpayers would come to an end with an immediate effect.” 

The story so far

• Service tax introduced in 1994, applicable to only three services then
• Covered 119 services by 2012
• In 2012, for the first time negative list of services issued. Any services outside it to attract service tax
• Before that, there was positive list. Only those in the list attracted service tax
• From April one, 2016, the tax was imposed on the license fee paid by liquor shops and those serving alcohol to state governments