Can states levy excise duty on 'industrial alcohol'?

Excise duty levied on alcohol is a key component of a state’s revenue, with states often adding an additional excise duty on alcohol consumption to drive its income up. For example, in 2023, Karnataka hiked the Additional Excise Duty (AED) on Indian Made Liquor (IML) by 20%.

Before SC

However, when it comes to ‘industrial alcohol’, whether state governments have the power to regulate and control the sale, distribution, pricing and other factors relating to ‘industrial’ alcohol? or whether the Centre exercises exclusive control on the subject? Essentially, this is the question that a 9-judge Bench of the Supreme Court is hearing.

Industrial alcohol is used as a raw material to create other products, and is not meant for human consumption.

Entry 8 in the State List under the Seventh Schedule gives states the power to legislate on the production, manufacture, possession, transport, purchase and sale of “intoxicating liquors”. At the same time, Entry 52 of the Union List, and Entry 33 of the Concurrent List mention industries, whose control is “declared by Parliament by law to be expedient in public interest”.

Industrial alcohol is listed in the Industries (Development and Regulation) Act, 1951 (IDRA).

Has the SC considered this issue earlier?

In 1989, a 7-judge Constitution Bench in Synthetics & Chemicals Ltd Vs. State of Uttar Pradesh held that states’ powers, as per Entry 8 of the State List, were limited to regulating “intoxicating liquors” which are different from industrial alcohol.

The SC acknowledged that states’ power to regulate consumable alcohol must include the power to “prevent and/ or check industrial alcohol being used as intoxicating or drinkable alcohol”. But the court found that the taxes and levies in question were designed primarily to increase the revenue collected by the state -not as measures to regulate the use of industrial alcohol, or prevent its conversion to drinkable alcohol.

Essentially, the SC said that only the Centre can impose levies or taxes on industrial alcohol, which is not meant for human consumption.

However, in a point that would be brought up decades later, the SC did not consider its prior Constitution Bench decision in Ch Tika Ramji Vs. State of UP (1956) where five judges upheld a legislation enacted in UP to regulate the supply and purchase of sugarcane. This Act was challenged on the grounds that under Section 18-G of the IDRA, the Centre had exclusive jurisdiction over regulation of the sugar industry.

In contrast to its Synthetic & Chemicals Ltd decision, the court held that Section 18-G is not meant to “cover the entire field” and the state still had power to legislate on matters relating to the sugar industry under Entry 33 of the Concurrent List.

How did this lead to the case now before the SC?

In 1999, the UP government issued a notification introducing a 15% fee for any sale made to licence holders under the UP Excise Act, 1910 for “alcohol used directly or…as solvent for vehicles and appear[ing] in the final product to some extent”. This was challenged by a motor oil and diesel distributor who claimed that the Centre exercised exclusive jurisdiction over industrial alcohol as per Section 18-G of the IDRA.

In February 2004 the Allahabad High Court struck down the 1999 notification, holding that the state legislature did not exercise power over the general regulation of denatured spirits, only over drinkable alcohol. It directed the state to refund any fees collected with a 10% per annum interest from the date the fee was deposited. This decision was appealed at the SC, which then stayed the Allahabad HC judgment in August that same year.

In 2007, the court referred the case to a larger bench, noting that the Tika Ramji case “had not been brought to the notice of the seven-Judge Bench which decided the Synthetics and Chemicals case”.

In order to determine whether states can exercise their powers under Entry 33 of the Concurrent List or if Section 18-G gives the Centre exclusive jurisdiction in matters relating to industrial spirits, in 2010 the case was referred to a nine-judge Bench.

What have the states argued so far?

The phrase “intoxicating liquors” in Entry 8 of the State List includes “all liquids containing alcohol”. ‘Liquor’, ‘spirit’, and ‘intoxicant’ were used in excise laws before the Constitution came into force.

The Union’s power under Entry 52 of the Union List does not include control over “finished products” (such as industrial alcohol after the denaturation process), as that is specifically covered by Entry 33 of the Concurrent List. In order to exercise exclusive control over regulation of industrial alcohol, the Centre would first have to issue an order to that effect under Section 18-G of the IDRA. Without such an order, that control would vest with the states.

Relying on Justice Ruma Pal’s concurring opinion in ITC Ltd Vs. Agricultural Produce Market Committee (2002). The SC had held that states are not “mere appendages of the Centre… The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States”.