Federalism wins in alcohol tax verdict

The Supreme Court’s ruling upholding the right of states to tax all alcohols, including the industrial variety, provides a major financial boost to states and strengthens their position on sharing of resources in the federal set-up.

A nine-judge bench ruled in an 8-1 majority that state governments have the power to regulate taxes on industrial alcohol.

The litigation is many decades old. It started in 1956 over regulation of sugarcane, which came under the state list, concurrent list and union list. A seven-judge bench of the Supreme Court ruled in 1990 that a state government cannot tax industrial alcohol.

This was challenged by several states, although the original petition was filed by the UP government. Subsequent judgments expressed different views, and so, in 2010, the court referred the matter for adjudication to a nine-judge bench. 

The dispute was about whether ‘intoxicating liquor’ could be defined to include ‘industrial alcohol’. Entry 8 of the state list in the Seventh Schedule gives states the power to regulate the production, transport and sale of intoxicating liquors. The bench held that it was designed to cover all kinds of alcohol, including the industrial variety.

The court recognised that there was an overlap of entries in the state and union lists. But it noted that if the entry in the union list is read to give the union complete control over industrial alcohol, the entry in the state list would become redundant.

Chief Justice of India D Y Chandrachud, who headed the bench, said that entries in the Seventh Schedule must be given a “wide meaning.” Since the two entries had to be read together, the court decided that the states’ case had to be given precedence over the Centre’s.

The judgement is important because it settles the issue of regulatory overlap in the union, state and concurrent lists. It underlines the need for a fair and balanced interpretation of the Constitution in changing times. 

The court’s decision could help states, especially at a time when many are complaining of denial of a fair share of central taxes. It follows another Supreme Court judgement in July which granted states the freedom to charge royalty on mining leases.

States are hard pressed since they are left with few resource-raising avenues after the introduction of the GST regime. Resource transfers from the Centre are based on rules and policies which many states want revised.

Some states see political discrimination by the Centre, and the conflict puts pressure on fiscal federalism. In such a setting, states would welcome new avenues of revenue opened by the ruling.