Context:
A nine-judge bench of the Supreme Court of India has made a significant ruling in an 8:1 decision, allowing states the authority to tax not only alcoholic beverages but also ‘industrial’ alcohol. This decision broadens the fiscal powers of states, marking a considerable shift in both taxation practices and the principles of federalism in India.
Relevance:
GS II: Government Policies and Interventions
Dimensions of the Article:
- Taxation Dispute on Industrial Alcohol
- SC’s Holding on Taxing Industrial Alcohol
- SC’s Judgment on Industrial Alcohol Taxation
Taxation Dispute on Industrial Alcohol: A Constitutional Conundrum
Why is Industrial Alcohol Taxation Controversial?
Overlapping Constitutional Authorities:
- Constitutional Entries Involved: The heart of the dispute lies in the overlapping constitutional entries within the Seventh Schedule of the Indian Constitution. This schedule divides legislative authority between the State and the Union.
- State List (Entry 8): States have the authority to legislate and tax intoxicating liquors.
- Union List (Entry 52): Grants the Union the power to regulate industries deemed vital to the national economy.
- Concurrent List (Entry 33): Both the Centre and states can legislate on industries declared by Parliament to be of national importance.
Claims of Jurisdiction by the Centre:
- Central Government’s Stance: The Centre asserts jurisdiction over industrial alcohol citing its broader implication in the industrial sector.
- Legal Foundation: This assertion is backed by the Industries (Development and Regulation) Act of 1951, which was legislated under the Union and Concurrent Lists, emphasizing the national importance of regulating such industries for economic coordination and development.
SC’s Holding on Taxing Industrial Alcohol:
Core question in this case:
- Whether “intoxicating liquor” could include “industrial alcohol”
- Actually the court was concerned with whether “industrial alcohol” could also include “intoxicating liquor”.
- Because of the potential for misdirection of its use in the illegal manufacture of intoxicating drinking liquor, the states thought they had an interest in industrial 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.
Dissent
- Justice B V Nagarathna dissented by holding that the Centre’s control over industrial alcohol has to be preserved.
- Industrial alcohol’s very nature, she argued should prevent it from being considered an intoxicating liquor despite all the abuse that can be given to the term.
- She thought that the Centre’s overall control of industries under the 1951 Act should prevent the states from regulating industrial alcohol.
SC’s Judgment on Industrial Alcohol Taxation: The Altered Lawmaking Power
Decision Overturned
- Reversal of Existing Judgment: The Supreme Court has overturned the 1990 judgment in Synthetics & Chemicals Ltd vs State of Uttar Pradesh, which had earlier banned the states from taxing industrial alcohol.
- State Powers Affirmation: The judgment affirms that states have the legal power to tax and control industrial alcohol, which again says that such alcohol is not fit to be consumed and hence is not similar to beverage alcohol.
State Revenue and Implications
Betterment of State Financial Resources
- The judgment has a very deep impact on state revenues since such revenues are highly dependent on the tax collected on alcohol.
- Karnataka Case Study: In this respect, Karnataka increased its Additional Excise Duty on Indian-made liquor by a whopping 20% within the year 2023, which reflects the monetary effects for all state economies involved.
Federal Forces and Center-State Relations
- No Balancing Federal Powers: This judgment helps establish the differential powers of the state versus the central government and reiterates the concept of the federal balance.
- Consistency in Constitution: The Supreme Court would be on the side of the states and would stand by a construction of the Constitution that rejects redundancy as well as supports a balanced approach toward co-governance.
- Preferment of Federal Decisions: This is accompanied by other decisions of late, including the July 2024 judgment in which it ruled in favor of the right of the states to collect royalties from mineral extraction, thus cementing the role of states in managing and realizing income from their resources.
-Source: Indian Express
