Sale of alcoholic liquor for human consumption is exempt supply requiring input tax credit reversal under Section 17(2)

AAR West Bengal ruled that sale of alcoholic liquor for human consumption constitutes non-taxable supply under GST Act, falling under exempt supply category. The applicant must reverse input tax credit attributable to such exempt supplies per Section 17(2) CGST Act read with Rule 42 GST Rules. The Authority rejected applicant's contention that ITC reversal would indirectly discharge GST liability on output supply, holding that input tax on inward supplies differs from outward exempt supplies, and reversal requirements apply regardless of output tax exemption.

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Issues Involved:
1. Legislative competence of Parliament to legislate on the sale of alcoholic liquor under the GST regime.
2. Applicability of the CGST Act to the sale of alcoholic liquor.
3. Definition of 'exempt supply' and 'non-taxable supply' under the CGST Act.
4. Obligation to reverse Input Tax Credit (ITC) under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules in relation to the sale of alcoholic liquor.

Issue-wise Detailed Analysis:

1. Legislative Competence of Parliament to Legislate on the Sale of Alcoholic Liquor under the GST Regime:
The applicant questioned whether the Constitution confers any power onto Parliament to legislate on the sale of alcoholic liquor for human consumption under the GST regime, considering Article 246A read with Article 366(12A). The Authority noted that Article 366(12A) defines GST as a tax on the supply of goods or services except for alcoholic liquor for human consumption, thus excluding it from GST's ambit. Consequently, the sale of alcoholic liquor remains outside the legislative competence of Parliament under GST.

2. Applicability of the CGST Act to the Sale of Alcoholic Liquor:
The applicant argued that the CGST Act cannot deal with the sale of alcoholic liquor either directly or indirectly. The Authority clarified that the CGST Act and the WBGST Act exclude the levy of tax on the supply of alcoholic liquor for human consumption. However, the sale of alcoholic liquor is still considered a 'supply' under Section 7 of the GST Act, which includes all forms of supply of goods or services for consideration in the course of business.

3. Definition of 'Exempt Supply' and 'Non-taxable Supply' under the CGST Act:
The applicant contended that the sale of alcoholic liquor should not be considered an 'exempt supply' or a 'non-taxable supply' under the CGST Act. The Authority found that 'exempt supply' under Section 2(47) includes 'non-taxable supply,' and 'non-taxable supply' under Section 2(78) refers to supplies not leviable to tax under the CGST Act. Since alcoholic liquor is not leviable to GST, it qualifies as a 'non-taxable supply,' and consequently, an 'exempt supply.'

4. Obligation to Reverse ITC under Section 17(2) of the CGST Act Read with Rule 42 of the CGST Rules:
The core issue was whether the applicant must reverse ITC under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules due to the sale of alcoholic liquor. The Authority held that Section 17(2) mandates the reversal of ITC attributable to exempt supplies. Since the sale of alcoholic liquor is an 'exempt supply,' the applicant is required to reverse ITC proportionately. The Authority rejected the applicant's argument that this would indirectly impose a tax on alcoholic liquor, clarifying that input tax credit pertains to inward supplies, which are distinct from outward exempt supplies.

Ruling:
The Authority ruled that the applicant is required to reverse ITC in terms of Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules for the sale of alcoholic liquor for human consumption.

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