WHEN LIQOUR MEETS GST: DOES BAR COUNTER REALLY BAR COMPOSITION SCHEME?

When Liquor Meets GST: Does a Bar Counter Really Bar the Composition Scheme? A fresh look at the scope of Section 10(2)(b) of the CGST Act, 2017

1. First Peg

The architecture of the Goods and Services Tax was designed to subsume a wide range of indirect taxes into a unified framework. Yet one notable exception remained untouched-alcoholic liquor for human consumption. By virtue of definition of GST under Article 366(12A) of the Constitution of India, GST applies to the supply of goods and services except alcoholic liquor for human consumption, thereby preserving the States' traditional power to levy Excise Duty on such products. Thus, while GST may dominate the tax landscape for most goods and services, liquor continues to flow through a parallel taxation channel under State Excise Laws.

2.Second Peg

The plot thickens when liquor crosses the counter of a restaurant, hotel, or brew-pub. Food served by such establishments is undoubtedly taxable under GST, but the liquor served alongside remains outside the GST net. This co-existence of GST supplies (food) and non-GST supplies (liquor) raises a curious legal question under the composition scheme provided in Section 10 of the Act. Section 10(2)(b) provides that a registered person shall be eligible for the composition scheme only if: 'he is not engaged in making any supply of goods or services which are not leviable to tax under this Act.' Does the presence of liquor at the bar counter mean that the establishment is engaged in making supplies not leviable to tax under the Act, thereby disqualifying it from the composition scheme?

3.The Composition Scheme: A Quick Refresher

The composition scheme under Section 10 was introduced to provide simplicity and ease of compliance for small taxpayers. Instead of navigating the complexities of input tax credits and detailed return filings, eligible businesses may pay tax at a fixed percentage of turnover. The scheme is therefore intended primarily for small businesses with relatively simple supply structures. To preserve this simplicity, the statute imposes certain restrictions, one of which appears in Section 10(2)(b).

4.The Interpretational Cocktail

At first glance, the provision appears straightforward. If a taxpayer supplies goods that are not leviable to GST, he cannot opt for the composition scheme. However, a closer look reveals an interesting shade. The phrase used in Section 10(2)(b) is ' if he is not engaged in making any supply of goods or services which are not leviable to tax under this Act.' This wording normally applies to situations where goods or services fall within the GST framework, but are not taxable, such as exempt supplies. In such cases, the transaction remains a recognised supply under the GST law, even though tax may not be payable. Liquor, however, occupies a fundamentally different position.

5. Liquor: Outside the GST Universe

Alcoholic liquor for human consumption is not merely an exempt supply under GST. Rather, it is entirely excluded from the GST regime by Constitutional design. Consequently liquor is not a taxable supply, it is not a nil-rated supply, and it is not even a supply recognised under the GST framework. Instead, it exists outside the GST universe, governed exclusively by State Excise Laws. This distinction raises an interesting question: Can a person be said to be 'engaged in making supply under the Act' when the activity itself lies outside the Act altogether?

6.The Legal Aftertaste

If the provision is read strictly, the restriction in Section 10(2)(b) appears to target supplies that are within the GST framework but not taxable. Activities that are completely outside GST may not naturally fall within this expression. From this perspective, one might argue that a restaurant supplying liquor is 'engaged in not making supply of goods not leviable to tax under the Act,' because such transactions are not supplies under the Act in the first place. Yet administrative practice generally proceeds on the assumption that restaurants serving liquor should not be permitted to opt for the composition scheme. Thus emerges a subtle tension between statutory language and administrative interpretation.

7.A Few Garnished Snacks for Thought

Before the last peg is raised, a few interpretational titbits may be worth biting on strict interpretation of taxing statutes suggests that disqualification should arise only where the statute clearly provides for it. The doctrine of casus omissus reminds us that courts cannot insert words into a statute to fill perceived gaps. A harmonious reading of the Constitutional framework may also support the view that activities outside GST should remain distinct from those regulated within it. These principles do not necessarily resolve the issue conclusively, but they certainly enrich the debate.

8.Exempt supply

Under Section 2(47) of the Act, 'exempt supply' includes non-taxable supplies, meaning supplies of goods or services which are not leviable to tax under the Act. However, alcoholic liquor for human consumption stands on a fundamentally different footing. By virtue of Article 366(12A) of the Constitution of India, such liquor is Constitutionally excluded from the GST regime itself, and therefore lies entirely outside the scope of the GST legislation. In that sense, liquor cannot logically be treated as an 'exempt supply' within the meaning of Section 2(47), because exemption presupposes the existence of a levy which is subsequently waived. Where the Constitution itself keeps a subject outside GST, the question of exemption does not arise at all; the transaction simply remains outside the GST law for all purposes. Effectively in strict Constitutional terms, only one category of goods entirely outside GST regime is: Alcoholic liquor for human consumption. This distinction becomes crucial when interpreting disqualification provisions such as Section 10(2)(b) of the Act.

9. Liquor Licence-Neither supply of goods nor service.

In view of specific exclusion of Alcoholic liquor for human consumption under Article 366(12A), the Government of India itself appears to have recognised the legal difficulty surrounding taxation of grant of liquor licences against hefty consideration in the form of licence fee or application fee as well. Accordingly, Notification No. 25/2019 - Central Tax (Rate) dated 30/09/2019 was issued declaring that the grant of licence by the State Government for dealing in Alcoholic liquor for human consumption shall be treated as neither a supply of goods nor a supply of services. This clarification indicates an acknowledgment that transactions integrally connected with liquor - which is Constitutionally excluded from GST under Article 366(12A) could raise serious questions if brought within the GST charging frame. A sensible decision indeed.

10.Last Peg

In the lively intersection where liquor meets GST, the bar counter seems to have sparked more than just spirited conversations. The wording of Section 10(2)(b) of the CGST Act, 2017 leaves room for reflection on whether the legislature truly intended the presence of liquor to automatically disqualify a taxpayer from the composition scheme. Until new brands of clarification or judicial guidance arrives, the issue remains an exciting interpretational blend-part constitutional design, part statutory wording, and part administrative practice. And so, as the discussion reaches its final pour, one lingering thought remains: does a bar counter really bar the composition scheme, or is the law simply waiting for a clearer mix? With that, the last peg is raised.

Bottoms Up

'If the law allows soothing intoxication, its interpretation must at least remain free from toxic blends'.

Cheers!