Service tax: Centre looks to take a swig of the liquor revenue

In Budget 2015-16, the Centre has laid claim to a share of the huge revenue that the liquor industry generates for various State governments.

The Centre has imposed a 14 per cent service tax on the manufacture of alcohol by proposing an amendment in Section 66D(f) of the Finance Act, 1994, which takes out manufacture of alcoholic liquor for human consumption from the negative list.

The negative list, introduced in 2012, consists of specified services that do not attract service tax.

Deepak Roy, Executive Vice-Chairman and CEO of Allied Blenders & Distillers, the country’s largest liquor maker, told BusinessLine that liquor companies may be forced to seek a price increase from States as the new tax will impose a huge burden on their finances.

Until now, liquor manufacture was part of this list. State governments earned revenue from the manufacture and sale of liquor by imposing State excise duty.

“Therefore, only State governments were benefiting from the manufacture of liquor. But now even the Centre will get revenue in the form of service tax from it,” Pramod Banthia, Indirect Tax Partner, Tax and Regulatory Services, PwC India, told BusinessLine . Banthia pointed out that earlier if a contract manufacturer or to a job worker was carrying out any related process on goods then that activity was not subject to service tax. This was because the processed goods came back to the principal manufacturer, who had to pay excise duty.

In the liquor industry, most of the manufacturing is outsourced to a third-party contract manufacturer or to a job worker.

With the new amendment, the third party will have to pay service tax.

This will be passed on to the brand owner or the principal manufacturer, which will have to bear this additional cost as service tax cannot be offset against the State excise duty. Roy said this would severely hit the bottomlines of liquor companies.

“It (the impact) will be huge. We will have to bear the additional burden because it is the States that determine the price of liquor. Therefore till they increase the prices again, our profits will be badly hit,” he said.

The prices are increased once in three to four years.

Roy said the levy will be 14.6 per cent on the bottling charge a bran-owner pays. He said that with an additional 2 per cent cess for Swachch Bharat being levied, the burden will only increase further.

Earlier, liquor companies could adjust the impact against VAT but this benefit will not be available from next year as liquor has been kept out of the GST ambit.

Liquor companies in India usually pay State excise duty, which in many cases, is at least five times the billing price and on an average about 200 per cent.

In the case of Allied Blenders & Distillers, the additional burden could be as high as ₹23 crore per year.

For United Spirits, the burden could go up to ₹100 crore.

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