Supreme Court Constitution bench rules by 8:1 majority: States can regulate industrial alcohol, overturns 1990 judgement

A nine-judge Constitution bench of the Supreme Court on Wednesday upheld the authority of state governments to regulate industrial alcohol, clarifying that it falls under the category of “intoxicating liquor”.  

In an 8:1 majority ruling, the bench asserted that industrial alcohol, despite not being intended for human consumption, is still considered an intoxicating substance, which states are allowed to tax those under Entry 8 of List II (State List) of the Seventh Schedule of the Constitution.

The Seventh Schedule of the Indian Constitution divides powers between the Union and state governments into three lists, which define the areas on which each can regulate and legislate.

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In the State List (List II), the term “intoxicating liquors” includes the production, manufacture, possession, transport, purchase, and sale of such substances, allowing states to formulate laws according to local conditions and requirements.

The court highlighted a common thread among alcohol, opium, and drugs: Their potential misuse as harmful substances.

It ruled that Parliament cannot usurp states' legislative powers regarding intoxicating liquors.

Chief Justice D.Y. Chandrachud, who authored the majority judgement, said "intoxicating" can also be understood as "poisonous", indicating that liquor not traditionally seen as alcohol could still be classified as "intoxicating liquor" under the Constitution.

The lone dissenting voice

While the majority—the CJI and Justices Hrishikesh Roy, A.S. Oka, J.B. Pardiwala, Ujjal Bhuyan, Manoj Misra, S.C. Sharma, and A.G. Masih—supported state powers, Justice B.V. Nagarathna dissented, arguing for parliamentary supremacy in regulating industrial alcohol.

She emphasized the importance of industrial alcohol in the Indian economy, particularly in its use for blending with petrol and manufacturing chemicals.

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Justice Nagarathna cautioned that the ruling has significant implications for the federal principle of unity in diversity, and central control could undermine state authority.

The 1990 judgement overturned

With this ruling, the apex court has overruled a 1990 seven-judge bench decision in the Synthetics & Chemicals Ltd vs State of Uttar Pradesh case, which limited state regulation to potable alcohol and placed industrial alcohol under central authority.

States like Kerala, Maharashtra, Punjab, and Uttar Pradesh voiced serious concerns about central control, as taxation powers over industrial alcohol are crucial for generating revenue, especially in the post-GST (goods and services tax) era.

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They also argued that centralizing control could hinder their ability to combat illegal consumption, stressing that they could not afford to remain passive until a tragedy occurred.

The Centre contended that industrial alcohol should be classified as an “industry” under its jurisdiction, based on parliamentary law to protect the public interest. This assertion was rooted in Entry 52 of the Union List of the Seventh Schedule of the Indian Constitution, which allows the Centre to regulate industries deemed to be in the public interest.

Moreover, the Centre claimed that trade, commerce, supply, and distribution of industrial alcohol fell under Entry 33(a) of the Concurrent List.

According to experts, the judgement may prompt states to impose higher taxes on industrial alcohol.

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“After this judgement, states may attempt to impose similar levies on industrial alcohol, leading to new or increased duties, fees, or regulatory charges for industries that rely on it in their manufacturing processes,” said SR Patnaik, Partner (Head - Taxation) at Cyril Amarchand Mangaldas. “This could result in a spike in operational costs for businesses across sectors like chemicals, pharmaceuticals, and automotive.”

The ruling presents states with a critical revenue stream as GST does not cover alcohol for human consumption, he said. “Consequently, we may see pricing disparities across states, as each government sets its own regulations.”

Patnaik adds that this escalation may also lead to consumers complaining about rising operational costs, prompting industries to shift to states with comparatively lower levies.

According to experts, this ruling will also affect pending litigations.

“There are pending litigations against notices issued by state governments demanding protective taxes or special fees from the trade. In several cases, the high court has granted stays on such levies based on earlier judgements from the Hon’ble Supreme Court, which held that states do not have the authority to impose these taxes. Therefore, the latest judgment will have significant ramifications for the trade currently involved in this litigation,” said Jitendra Motwani, Partner at Economic Laws Practices.

However, industry bodies called the verdict beneficial.

“At first glance, ruling by the 9-judge bench of the Supreme Court is very welcome, although one will need to look at the details and what specific aspects of Synthetics have been overruled by today's ruling,” said Suresh Menon, secretary-general, ISWAl, a spirits association that represents the interests of international brands in India. “Given that all distilled alcohol is initially un-denatured, and hence capable of human consumption notwithstanding its strength, entrusting the states with the power to regulate the production and manufacture, until such time as it certifiably becomes incapable of human consumption through a process of denaturing, is welcome.”

Anant S. Iyer, director general of Delhi-based spirits advocacy Confederation of Indian Alcoholic Beverage Companies (CIABC), said, “Prima facie this could be beneficial for the industry. While we have to wait for our lawyers to decipher the detailed judgment, we understand that now alcohol production and its regulatory controls is within the purview of the state, and not the centre. This decision means that the IMFL industry for which ENA is the base ingredient is now not sitting between two stools in so far as taxation matters vide ENA are concerned.”