Excise Duty on Industrial Alcohol

Context

There is a hearing on whether states have the authority to levy excise duty on industrial alcohol by a 9-judge Bench of the Supreme Court. 

Excise Taxes On Alcohol

• Excise taxes on alcohol is a key component in state finances.
• Additional excise duties are commonly imposed by states to increase  their income from alcohol consumption.

About Industrial Alcohol

• Industrial alcohol is also called denatured alcohol.
  • Denaturation is the process of making industrial alcohol unsuitable for misuse or consumption.
    • It involves adding substances such as methanol or other chemicals.
  • Denaturation makes the alcohol toxic or unpalatable, ensuring it’s not fit for drinking purposes.
• Its primary use lies in industrial, commercial, and scientific sectors rather than as a beverage.
• Applications:
  • Raw Material: It serves as a base material in various industries.
  • Solvent: Used in making paints, varnishes, and coatings.
  • Fuel: Employed as a fuel additive or in biofuel production.
  • Pharmaceuticals: Essential in manufacturing medicines and extracts.
  • Chemical Processes: Vital for numerous chemical reactions.

Legal Framework

• State List (Entry 8): 

  • This list Grants states the power to legislate on the production, manufacture, possession, transport, purchase, and sale of “intoxicating liquors.”

• Union List (Entry 52) and Concurrent List (Entry 33):

  • Entry 52 gives control over industries to the Union.
  • Entry 33 allows for industries’ regulation to both state and union
    • The entries of these industries are  declared expedient in the public interest by Parliament.

• Concurrent List Dynamics:

  • Subjects in the Concurrent List can be regulated by both states and the Centre.
  • However, if a central law exists, state laws cannot contradict it.

• Industrial Alcohol Regulation:

• • Industrial alcohol falls under the Industries (Development and Regulation) Act, 1951 (IDRA).

Previous Judicial Consideration

• Synthetics & Chemicals Ltd v. State of Uttar Pradesh (1989):
  • Court Decision:
    • In 1989, a 7-judge Constitution Bench ruled on Synthetics & Chemicals Ltd v. State of Uttar Pradesh.
    • The Supreme Court (SC) clarified that states’ authority under Entry 8 of the State List is limited to regulating “intoxicating liquors,” distinct from industrial alcohol.
  • Interpretation of State Powers:
    • While states can prevent industrial alcohol misuse as a drink, their power primarily concerns consumable alcohol regulation.
    • The SC emphasized that taxes and levies on industrial alcohol aim at revenue generation, not regulation or prevention of its misuse.
  • Center’s Exclusive Authority:
    • The SC affirmed that only the Centre has the authority to impose levies or taxes on industrial alcohol, which is not intended for human consumption.
  • Reference to Ch Tika Ramji v State of UP (1956):
    • The SC did not consider its prior decision of Ch Tika Ramji v State of UP in Synthetics & Chemicals Ltd v. State of Uttar Pradesh (1989) case. 
    • In Ch Tika Ramji v State of UP (1956), the Supreme Court (SC) upheld legislation by the Uttar Pradesh (UP) government to regulate sugarcane supply and purchase.
      • The legislation faced a challenge based on Section 18-G of the Industries (Development and Regulation) Act (IDRA), which grants exclusive jurisdiction to the Centre over sugar industry regulation.
        • It emphasized that Section 18-G does not cover all aspects of the sugar industry, allowing states to legislate under Entry 33 of the Concurrent List.

Legal Battle Over Industrial Alcohol Regulation

• UP Government’s Notification (1999):

  • In 1999, the Uttar Pradesh (UP) government implemented a notification.
  • This notification introduced a 15% fee for sales to license holders under the UP Excise Act, 1910.
    • The fee applied to sales involving alcohol directly used or acting as a solvent for vehicles.
    • Additionally, it covered instances where alcohol appeared in the final product to some degree.

• Challenge and High Court Ruling (February 2004):

  • A motor oil and diesel distributor contested the fee notification.
  • They argued that the Center held sole authority over industrial alcohol as outlined in Section 18-G of the IDRA.

• In February 2004, the Allahabad High Court Invalidated the Notification:

  • It ruled that the state lacked authority over denatured spirits’ general regulation, only having control over drinkable alcohol.
  • Later, The High Court ordered the state to refund collected fees with a 10% per annum interest.

• Supreme Court Intervention (August 2004): 

• • The decision was appealed to the Supreme Court (SC), which stayed the High Court’s judgment in August 2004.

• Referral to Larger Bench (2007) and Ultimate Resolution (2010):

• • In 2007, the SC referred the case to a larger bench, noting the oversight of the Ch Tika Ramji case.
  • Ultimately, in 2010, a nine-judge Bench was convened to determine states’ powers under Entry 33 of the Concurrent List versus the Centre’s authority under Section 18-G regarding industrial spirits.

Arguments Presented On Behalf of the State of UP

• Interpretation of “Intoxicating Liquors”:

  • It was shown that “intoxicating liquors” in the State List means any liquid containing alcohol.
  • The terms were pointed  like ‘liquor,’ ‘spirit,’ and ‘intoxicant’  as these were used in alcohol laws before the Constitution.

• Union’s Authority and Finished Products:

  • There was an argument that the Union’s control, as per Entry 52, doesn’t cover finished products like industrial alcohol.
    • To control industrial alcohol regulation, the Centre must issue an order under Section 18-G of the IDRA.
    • In the absence of such an order, states have control.

• Preservation of States’ Powers:

• • State of UP warned against weakening states’ authority, referring to a judge’s opinion in a previous case.
    • It was stressed that states shouldn’t be seen as less important than the Centre, and their powers should be protected.

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