United Spirits Limited, India’s largest spirits company, has moved the Madhya Pradesh High Court against a Value Added Tax (VAT) demand of Rs 7 crore for financial year 2020-21.
In a regulatory filing, United Spirits said it has filed a writ petition in the Jabalpur bench of the High Court challenging the demand raised by the state sales tax authorities. This follows similar demands raised by the authorities for fiscal 2017-18 to 2019-20, against which United Spirits has already filed writ petitions in the High Court.
The trigger for the disputes is the Goods and Services Tax (GST) regime introduced in 2017. United Spirits procures Extra Neutral Alcohol (ENA), the base material for manufacturing alcoholic beverages, from suppliers in Madhya Pradesh. Before GST, this attracted VAT in the range of 20-40% in different states.
However, under GST, ENA was provisionally put under the 12% GST bracket. This led to VAT authorities in some states, including Madhya Pradesh, to disallow the input tax credit claimed by companies like United Spirits on ENA procured locally.
United Spirits maintains that ENA continues to attract VAT and hence the credit on local purchases cannot be denied. The GST Council is yet to take a final decision on whether ENA should be permanently placed under GST or under the state VAT regime.
The Madhya Pradesh High Court has passed interim orders in similar cases that companies can continue to pay VAT on ENA until the GST Council decides finally. United Spirits has taken confidence from these orders to file writ petitions for various assessment years.
For 2020-21, the VAT demand raised on United Spirits is Rs 0.99 crore plus a penalty of Rs 0.1 lakh. The Central Sales Tax demand is Rs 5.99 crore and Rs 0.02 lakh penalty. The total demand of Rs 70 crore adds to cumulative disputes of Rs 30.4 crore for the past four assessment years. United Spirits already set aside Rs 23.4 crore as contingent liability.
In its regulatory update, United Spirits said it expects no material impact on its finances as it has a strong case. The demand is on account of input tax credit denial, not the regular VAT on liquor sales.
Industry experts say states could stand to lose significant revenues if ENA goes out of the VAT net permanently. United Spirits may have to incur higher costs if the input tax credit is permanently disallowed.
The shares of United Spirits, majority owned by global spirits giant Diageo Plc, are trading largely flat since the earlier disclosures on the VAT disputes. Analysts await the final rulings, even as the matter may drag on further at appellate forums. Companies have had mixed success so far in different state jurisdictions.
The GST Council decision on ENA classification will be key as it would provide long-term certainty on the applicable indirect tax regime for the entire alcoholic beverages industry.