Nine-Judge Bench Rules on Taxation of Industrial Alcohol: States Retain Authority

In a landmark decision, the Supreme Court of India recently addressed the issue of taxation and regulation of industrial alcohol. The case, titled State of Uttar Pradesh and ors v Lalta Prasad Vaish, examined whether States have the authority to regulate industrial alcohol under Entry 8 of the State List or if only the Union government can regulate it under Entry 52 of the Union List.

The ruling came from a nine-judge Constitution Bench, which was formed to resolve conflicting judgments regarding the powers of State and Union governments over certain industries. The case has significant implications for the Industries (Development and Regulation) Act (IDRA) and taxation laws in India.

Key Findings

• Justice BV Nagarathna, in a dissenting judgment, argued that States cannot impose taxes on industrial alcohol under Entry 8 of the State List, as it is classified as a fermentation industry under the IDRA, which falls under Union regulation.
• The majority opinion, however, ruled that States have the authority to regulate and tax industrial alcohol, as it falls under the broader category of intoxicating liquor within Entry 8 of the State List.

Background

• The question before the nine-judge Bench was whether States could regulate industrial alcohol (denatured spirits) via Entry 8 of the State List, which pertains to intoxicating liquors.
• Conversely, Entry 52 of the Union List allows the Central Government to regulate industries declared by Parliament as being of public interest.
• The case was referred to the nine-judge Bench on December 8, 2010, after previous conflicting judgments on the matter.

Justice Nagarathna’s Dissenting Judgment

• Justice Nagarathna maintained that industrial alcohol falls under item 26 of the First Schedule of the IDRA, making it a Union-regulated industry.
• The IDRA was enacted under Article 246 read with Entry 52 of the Union List, and the judge stressed that only the Union government can regulate industries listed in the IDRA.
• The judge emphasized that allowing both the State and Union governments to regulate the same industry would lead to haphazard development and undermine the IDRA’s purpose of ensuring uniform growth across India.
• She further clarified that State legislatures have the power only over intoxicating liquors such as beverages and cannot legislate on industrial alcohol.

Majority Opinion

• The majority of the judges ruled that industrial alcohol can be classified as intoxicating liquor and falls under Entry 8 of the State List.
• Chief Justice of India DY Chandrachud, along with Justices Hrishikesh Roy, Abhay S. Oka, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih, formed the majority.
• The ruling overturned the 1990 decision in Synthetics & Chemicals Ltd. v. State of Uttar Pradesh, which had restricted State regulation of industrial alcohol.
• The majority held that States could regulate industrial alcohol to safeguard public health, as it falls within the scope of Entry 8 of the State List.

Implications of the Decision

• The ruling has reaffirmed State authority over certain aspects of industrial regulation, while also establishing boundaries for Union control under the IDRA.
• Justice Nagarathna’s dissent echoes her previous stance in the July 26, 2024, nine-judge Constitution Bench judgment on State taxation powers over mining and mineral-use activities.
• Key Quotes from Justice Nagarathna’s Dissent
  • “The interpretation of constitutional Entries must reflect the intentions of the framers, considering the Indian economy’s need for uniform development of specific industries.”
  • “State legislatures cannot legislate on scheduled industries under the IDRA as it would disrupt uniform industrial development across the nation.”

Appearances in the Case

• Union Government: Attorney General R. Venkataramani, Solicitor General Tushar Mehta, and Advocate Kanu Agrawal.
• State of Uttar Pradesh: Senior Advocate Dinesh Dwivedi.
• Proponents of State authority: Senior Advocates Arvind Datar, V. Giri, Jaideep Gupta, Balbir Singh, and Shadan Farasat.

Click to read: State of Uttar Pradesh and ors v Lalta Prasad Vaish