Appellant must reverse ITC under Section 17(2) and Rule 42 for alcoholic liquor sales deemed exempt supplies

The AAAR, West Bengal dismissed the appeal regarding ITC reversal on alcoholic liquor sales. The authority held that appellant must reverse ITC under Section 17(2) read with Rule 42 of GST Rules, 2017 for alcoholic liquor sales for human consumption. The court clarified that while alcoholic liquor constitutes "goods" under constitutional definition, it remains non-taxable under GST Act Section 9, making it an exempt supply under Section 2(47). Since ITC is meant for output tax payment and alcoholic liquor is non-taxable, ITC cannot be allowed for such supplies, requiring reversal to the extent of exempt turnover.

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Issues involved:
1. Condonation of delay in filing the appeal.
2. Obligation to reverse Input Tax Credit (ITC) under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules in view of the sale of alcoholic liquor for human consumption.
3. Classification of alcoholic liquor for human consumption as goods under GST law.
4. Definition and implications of non-taxable and exempt supply under the GST Act.
5. Legislative intent and interpretation regarding the exclusion of alcoholic liquor from the GST regime.

Summary:

Condonation of delay:
The request for condonation of delay in filing the appeal was accepted under Section 100(2) of the West Bengal Goods and Services Tax Act, 2017/ Central Goods and Services Tax Act, 2017.

Obligation to reverse ITC:
The principal question was whether the appellant is required to 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 for human consumption. The WBAAR held that the sale of alcoholic liquor qualifies as a non-taxable supply under the GST Act and thus falls under the category of exempt supply. Consequently, the appellant is required to reverse ITC attributable to the exempt supply.

Classification of alcoholic liquor:
The appellant contended that alcoholic liquor for human consumption does not qualify as goods under GST law, citing Article 366(12A) of the Constitution, which excludes it from the GST regime. However, the WBAAR and the appellate authority found that alcoholic liquor is considered goods under the GST Act, although it is excluded from GST levy.

Non-taxable and exempt supply:
The WBAAR observed that the sale of alcoholic liquor for human consumption is a non-taxable supply under Section 2(78) of the GST Act and is treated as an exempt supply under Section 2(47) of the GST Act. Therefore, the appellant must reverse ITC in accordance with Section 17(2) of the GST Act read with Rule 42 of the GST Rules.

Legislative intent and interpretation:
The appellant argued that the legislative intent was to exclude alcoholic liquor from the GST regime and that reversing ITC indirectly imposes a tax on alcoholic liquor, which is prohibited. The appellate authority, however, maintained that the exclusion pertains to the levy of tax and does not affect the classification of alcoholic liquor as goods or the requirement to reverse ITC for exempt supplies.

Ruling:
The appellate authority confirmed the WBAAR ruling, stating that the sale of alcoholic liquor for human consumption is a non-taxable supply and an exempt supply under the GST Act. Consequently, the appellant is required to reverse ITC in terms of Section 17(2) of the GST Act read with Rule 42 of the GST Rules. The appeal was rejected.

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