Raw materials in 18% & 28% slabs: Despite exemption, alcohol may witness up to 15% hike in prices

What the industry has sought is that if an aggregator of old bottles purchased a bottle for Rs 2 and sold it to an alcohol company for Rs 3, then 18 per cent tax should be levied on the one-rupee margin made by the aggregator.

Written by Pranav Mukul | New Delhi | Published:June 29, 2017 6:16 am

Alcoholic beverages, sales of which contribute nearly one-fifth of tax revenues for many states, could see a 3-5 per cent price hike in beverages like whiskey and wine, and 12-15 per cent in beer after GST is rolled out. This is on account of liquor being exempted from GST, but the major raw materials used for its manufacturing — glass bottles, molasses, barley malt, denatured alcohol — being put under the GST slabs of 18 per cent and 28 per cent.
Under the new system, most sectors will get credit for taxes paid on raw materials, while paying GST on the output. However, since alcoholic beverages are out of GST ambit, manufacturers will pay GST on the raw materials they acquire but will not be able to set it off on their end-products. This is unlike food-grains, which are zero-rated. The zero-rated items, by the virtue of being under GST, will be eligible for claiming tax credit on the raw materials and other input services.

“We had requested both Centre and states to keep us in GST. That’s not happened, and the result is that input tax credit can normally be availed by everybody in the GST chain, but we will not be able to get a set-off. This will raise our raw materials and input services cost, which will be passed on to consumers, or in case of states where prices are government-controlled, we will have to negotiate, or it will be at the cost of the margins of the industry,” said Shobhan Roy, director general, All India Brewers Association.

Depending on segment and product, raw materials comprise 20-50 per cent of total expenses for liquor makers, and such input costs will rise 12-15 per cent due to the inverted tax structure.

“There are 2-3 states, which control the prices, rest of the country is a free market. But if prices go up, there would be a downward shift in the consumer demand from a particular category, and they’ll go to a lower category product, and the revenue for the states will get affected,” Roy added.

United Spirits, on May 31, said that the additional taxes to be paid by the sector could result in margins witnessing an impact. “Our initial assessment on GST suggests that, while alcohol for human consumption has been excluded from GST, the additional tax on input materials and services will result in stranded taxes, and impact margins. We shall continue to work with the Centre to minimise this impact, and approach states for appropriate price increases,” the firm said.

However, there is a likelihood of relaxation on GST for second-hand bottles, on which liquor firms rely heavily. Not only do second-hand bottles cost one-third of new ones in certain cases, but firms also currently save on excise by using old bottles, which have a lifetime of up to seven uses.

“We have represented the issue of second-hand bottles. On manufacturing you had paid central excise and sales tax, which has been combined under GST. Once you are using the bottle again, there’s no manufacturing involved. So you can’t apply 18 per cent on it… We have represented to the government with a theory known as the margin theory,” Roy said, adding that the industry was hopeful of receiving a clarification from the Centre before June 30.

This essentially means that for a second-hand bottle purchased at Rs 3, liquor firms are expected to pay 18 per cent GST on Rs 3. What the industry has sought is that if an aggregator of old bottles purchased a bottle for Rs 2 and sold it to an alcohol company for Rs 3, then 18 per cent tax should be levied on the one-rupee margin made by the aggregator.

Industry won’t be able to claim credit on transport and packaging too. “For glass bottles, the tax rate has gone up from 15 per cent to 18 per cent… Fortunately, one of our major inputs, grain spirit, is out of GST. For all the services and packaging materials, rates have also gone up by almost 3 per cent” said Deepak Roy, vice-chairman, Allied Blenders and Distillers.

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