Why in News?

A nine-judge Bench of the Supreme Court of India (SC), in an 8:1 decision, ruled that states have the authority to impose taxes not only on alcoholic beverages but also on 'industrial' alcohol. This decision expands states' revenue-generating capabilities, with significant implications for both taxation and federalism.

What’s in Today’s Article?

• Background of the Dispute of Taxing Industrial Alcohol
• The SC’s Verdict on Taxing Industrial Alcohol
• Implications of SC’s Verdict on Taxing Industrial Alcohol

Background of the Dispute of Taxing Industrial Alcohol:

• Background:
  • 
• Why is the taxation of industrial alcohol controversial?
  • Overlapping constitutional entries:
    • The dispute involved two entries in the Seventh Schedule of the Constitution.
    • Entry 8 of List II (State List) gives states authority over intoxicating liquors, while Entry 52 of List I (Union List) grant the Centre the power to regulate industries.
    • Additionally, Entry 33 of List III (Concurrent List) grants the Centre authority over any industry that Parliament has legally determined to be in the public interest.
  • Centre claims its jurisdiction:
    • According to the central government, industrial alcohol falls under its jurisdiction due to its inclusion in the Industries (Development and Regulation) Act, 1951.
    • The Act was passed by Parliament under the above two heads of the Union and Concurrent Lists.

The SC’s Verdict on Taxing Industrial Alcohol:

• The main question before the court:
  • The court's primary concern was whether the term "intoxicating liquor" could also encompass "industrial alcohol."
  • States argued that they should regulate industrial alcohol, given its potential misuse in creating illegal consumable 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.
• Dissenting opinion:
  • Justice B V Nagarathna dissented, arguing that the Centre should retain control over industrial alcohol.
  • She maintained that industrial alcohol, by its nature, should not fall under the definition of intoxicating liquor, despite its potential misuse.
  • In her view, the Centre's control over industries, as outlined in the 1951 Act, should prevent states from regulating industrial alcohol.

Implications of SC’s Verdict on Taxing Industrial Alcohol:

• Overturned a previous judgement:
  • The majority ruling overturned the SC's 1990 judgement in Synthetics & Chemicals Ltd vs State of Uttar Pradesh, which had held that states could not tax industrial alcohol.
  • The latest decision affirms that states have the legislative competence to regulate and tax industrial alcohol, even though it is non-potable.
• Impact on States' revenue:
  • The court’s decision significantly impacts state revenues, with alcohol taxation already being a major source of income.
  • For example, Karnataka raised its Additional Excise Duty (AED) on Indian-made liquor by 20% in 2023.
  • The ruling reaffirms states' ability to control this critical revenue stream.
• Federal balance and Centre-State relations:
  • The ruling addressed the delicate balance between state and central powers.
  • The majority emphasised that, when constitutional entries overlap, the interpretation that preserves federal balance should prevail.
  • In this case, giving states the power over industrial alcohol aligns with maintaining that balance, avoiding redundancy in constitutional provisions.
  • This decision follows a similar 8:1 majority ruling (in July 2024), which upheld states' authority to levy royalties on mineral extraction and tax the lands where mines are located.