GST on Alcohol: Why Liquor Is Outside GST

People search for the GST rate on alcohol expecting a number like 18% or 40%. There isn't one. Alcoholic liquor for human consumption is one of the few things the Constitution keeps out of GST altogether, so there is no GST on alcohol sold to drink: the states tax it through excise duty and VAT instead. This guide explains why, what that means on a bar or restaurant bill, and the parts of the liquor business that are still under GST: bottles, packaging, job work, industrial alcohol and the input tax credit question that follows.

Why there is no GST on alcohol

When GST was designed, the states agreed to give up most of their indirect taxes, such as VAT, entry tax and luxury tax, in exchange for a share of a single national tax. Liquor was the exception they would not give up. Excise and sales tax on alcohol are among the largest revenue sources most states control on their own, and the power to set liquor policy, including prohibition, has always sat with the states.

The Constitution (One Hundred and First Amendment) Act, 2016 wrote that settlement into the definition of GST itself. Article 366(12A) defines "goods and services tax" as any tax on the supply of goods or services or both, except taxes on the supply of alcoholic liquor for human consumption. The levy section of the CGST Act follows the same line: GST is charged on all intra-State supplies except alcoholic liquor for human consumption, and the IGST Act mirrors it for inter-State supplies. The state lists in the Seventh Schedule were amended at the same time so that the states kept their power to levy excise duty on alcoholic liquor and to tax its sale.

That makes alcohol different from petroleum. Petrol, diesel, crude, natural gas and aviation fuel are constitutionally within GST, and only the date from which GST applies to them is left for the GST Council to recommend; see GST on petrol and diesel. Bringing alcohol into GST would need a further constitutional amendment. The background to the 2016 amendment is in when GST was implemented in India.

What tax applies to liquor instead

A bottle of liquor carries the taxes that applied before GST, and they are all state taxes. There is no single "GST on liquor" figure because there is no single rate. Each state sets its own.

The GST Council has also clarified that a state granting a liquor licence in return for a licence fee is not a supply on which GST is payable, so the licence fee itself does not attract GST. Because the excise and VAT rates differ so much between states, the same bottle can cost very different amounts on either side of a state border, and the GST structure does nothing to even that out.

What counts as alcoholic liquor

The exclusion covers alcoholic liquor for human consumption, not alcohol in general. Both parts of the phrase matter.

• Spirits, wine and beer are all alcoholic liquor. Beer is not treated differently because it is lower in alcohol; it is outside GST and taxed by the state like whisky or rum.
• Country liquor and toddy sold for drinking are also alcoholic liquor for human consumption, and their taxation is a state matter.
• Non-alcoholic beer and alcohol-free wine are ordinary beverages. They are under GST at the rate notified for their tariff heading.
• Alcohol that is not meant to be drunk, such as denatured spirit, ethanol for blending with petrol, or alcohol used to make sanitisers, chemicals or medicines, is not liquor for human consumption and is taxed under GST.

Alcohol on a restaurant or bar bill

This is where most people meet the question of GST on liquor. A restaurant with a bar is making two kinds of supply on one bill. The food and soft drinks are a restaurant service under GST, at the rate that applies to that restaurant. The drinks are a sale of liquor, taxed by the state under its VAT law.

A correct bill keeps them apart: the food lines with GST worked out on the food subtotal, the alcohol lines with VAT worked out on the alcohol subtotal. Neither tax is charged on top of the other.

The usual mistakes to watch for are a single "GST" percentage applied to the whole bill including drinks, or CGST and SGST shown against the alcohol lines. Either means tax is being charged on a base where GST does not apply. The rate on the food side, 5% without credit for most standalone restaurants and 18% with credit in specified premises, is covered in restaurant GST rates explained, and what the CGST and SGST split means is in CGST, SGST and IGST.

If a bill shows GST at all, it should also show the restaurant's GSTIN, and that GSTIN should be active and belong to the business that served you. You can check that in a few seconds with a GSTIN verification; our guide to checking whether GST on a bill is real walks through what else to look at.

What around liquor is still under GST

Only the liquor itself is outside GST. Almost everything a distillery, brewery or bar buys, and many services sold within the industry, are ordinary supplies under GST.

Job work deserves a note. Many brands are bottled under contract: the brand owner supplies the materials or the recipe, and a distillery manufactures and bottles for a fee. The liquor that comes out is outside GST, but the distillery's service of manufacturing it for someone else is a supply of service, and GST applies to the job-work charge. The GST Council has generally kept this service at the standard rate rather than the concessional rate available to some other kinds of job work, so check the current entry in the services rate notification before invoicing.

Extra neutral alcohol and industrial alcohol

Extra neutral alcohol (ENA) is the high-purity spirit that distilleries blend, dilute and flavour into whisky, vodka, gin and rum. For several years after 2017 it sat awkwardly between the two systems: it was not itself drunk, so suppliers charged GST on it, while some states also treated it as within their power over intoxicating liquor.

The GST Council resolved this by recommending that ENA used for manufacturing alcoholic liquor for human consumption be kept outside GST, and the levy section of the CGST Act was amended to exclude it. ENA and rectified spirit going into liquor for drinking are now on the state side of the line, along with the liquor itself. The Supreme Court has separately recognised the states' power to regulate and tax intoxicating liquor broadly, which supports the same result.

Industrial alcohol is different. Denatured spirit, ethanol for fuel blending, and alcohol supplied to chemical, pharmaceutical and sanitiser makers is not for human consumption, so it is a taxable supply under GST at the rate notified for it. A distillery that sells both ENA for liquor and alcohol for industrial use is therefore making non-GST and GST supplies side by side, which brings in the credit question below.

Input tax credit for liquor makers, bars and hotels

Because liquor is outside GST, its makers and sellers pay GST on their inputs but charge no GST on the liquor they sell. That GST cannot simply be recovered. The law treats a non-taxable supply as an exempt supply for credit purposes, and input tax credit is available only for inputs used for taxable supplies.

• Inputs used only for liquor, such as bottles and labels for a whisky brand, carry no credit. The GST becomes part of the cost.
• Inputs used only for taxable supplies, such as packaging for industrial alcohol or food ingredients in a restaurant, carry credit in the normal way, subject to the usual conditions in the ITC rules.
• Common inputs and capital goods, such as rent, electricity, a distillation plant or a hotel's shared services, carry credit only in proportion to taxable turnover. The exempt share has to be reversed under Rule 42 for inputs and Rule 43 for capital goods; the formula and worked examples are in ITC reversal under Rules 42 and 43.

Hotels feel this most. A hotel that claims credit on its building, fit-out and services, and also runs a bar, has to count the bar's liquor turnover as exempt turnover when it splits common credit. A hotel with a large bar business can find a meaningful share of its credit reversed every month, and an annual true-up after the year closes. Liquor sales also count in aggregate turnover as non-taxable supplies, which matters for registration and other turnover thresholds, even though no GST is charged on them.

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