 "Apex court upholds states' right to regulate taxes on industrial alcohol")
In a big victory for states, the Supreme Court (SC) on Wednesday, in an 8:1 majority, upheld the states’ right to regulate taxes on industrial alcohol, overruling a 1990 judgment.
The verdict is likely to impact entities involved in the industrial alcohol sector, which will have to watch out for consequential regulatory changes in the future.
The court stated that ‘industrial alcohol’ falls within the meaning of ‘intoxicating liquor’ under Entry 8 of List II (State List) of the Constitution, allowing states to regulate and tax it accordingly.
A nine-judge Constitution Bench led by Chief Justice of India (CJI) D Y Chandrachud, including Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih, delivered its ruling on Wednesday. Justice Nagarathna provided a separate dissenting judgment.
The Bench indicated that the meaning of intoxicating liquor under Entry 8 of the State List extends beyond the narrow definition of alcoholic beverages or potable alcohol and includes all types of alcohol that can adversely affect public health.
“Alcoholic liquor and intoxicating liquor are used for consumption, but the entry of intoxicating liquor extends to its manufacturing, etc. Alcoholic liquor is defined by its ingredients, and ‘intoxicating’ is defined by its effects. Thus, alcoholic liquor can be classified under the latter if it causes intoxication. The public interest purpose is evident from the construct and evolution of the entry,” the court stated.
The question before the Bench was whether states could regulate industrial alcohol/denatured spirits through Entry 8, which grants powers to the state to deal with intoxicating liquors. Conversely, Entry 52 of the Union List empowers the central government to regulate industries declared by Parliament as being of public interest.
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The court acknowledged the potential overlap between the two entries and stated that the resolution lies in reconciling them to ensure neither is rendered redundant. The court emphasised that legislative lists must be interpreted broadly, asserting that intoxicating liquor under Entry 8 cannot be confined to potable alcohol.
Justice Nagarathna, in her dissent, observed, “The subject ‘intoxicating liquors’ falls exclusively within the domain of the state legislatures, which also have the obligation to prevent ‘industrial alcohol’ from being converted into ‘intoxicating liquors’ as an abuse. Therefore, they must pass legislation or take state action in this regard, considering Article 47 of the Constitution of India.”
She remarked that “the question of a desirable balance between central and state governments must be viewed in the context of the country’s ongoing need to promote economic growth while upholding and expanding social rights”.
The majority Bench has now overruled the 1990 judgment in Synthetics & Chemicals vs State of Uttar Pradesh, which said that ‘intoxicating liquor’ refers only to potable alcohol and that states cannot tax industrial alcohol.
“Entry 8 of List II cannot be used to exclude raw materials that go into the production of intoxicating liquor,” the court ruled.
The matter was referred to a nine-judge Bench in 2007 and pertains to the interpretation of Section 18G of the Industries (Development and Regulation) Act, 1951. This provision allows the central government to regulate the distribution and prices of certain products related to scheduled industries. However, Entry 33(a) of the Concurrent List in the Constitution gives states the power to regulate trade, production, and distribution of products from industries under the control of the Union.
The court found that Synthetics & Chemicals vs State of Uttar Pradesh — a seven-judge Bench judgment — failed to address Section 18G’s interference with the concurrent powers of the states.
Furthermore, Entry 8 of the State List in the Seventh Schedule also provides powers to the states regarding the regulation of ‘intoxicating liquor’.
“This is important because the court felt compelled to prioritise public interest in providing more regulation over this liquor to state governments, seeing it posed a public health concern. One may speculate about more regulations concerning the transport, production, possession, and sale of industrial alcohol, with state governments gaining more power. However, it is undeniable that the ruling grants state governments the autonomy to manage the consumption of poisonous industrial alcohol and its illegal byproducts,” Shryeshth Ramesh Sharma, partner at SKV Law Offices, said.
“By an 8-1 majority, the SC ruled that the states have the power to regulate ‘denatured spirit or industrial alcohol’. It was held that the term ‘industrial alcohol’ cannot be interpreted narrowly to include only alcohol fit for human consumption, but also other liquids containing alcohol. This is a huge victory for state governments, as it empowers them to combat the illegal consumption of industrial alcohol by introducing regulatory changes and imposing taxes and duties. The judgment will impact entities involved in the industrial alcohol sector, which will have to be vigilant regarding consequential regulatory changes,” Kunal Savani, partner at Cyril Amarchand Mangaldas, said.
Court’s view
> ‘Industrial alcohol’ comes within the meaning of 'intoxicating liquor' under Entry 8 of List II (state List) of the Constitution and states can regulate and tax the same
>The subject ‘intoxicating liquors’ falls exclusively within the domain of the state legislatures, which also have the obligation to prevent ‘industrial alcohol’ from being converted into ‘intoxicating liquors’