According to sources, the industry has simultaneously approached the government, seeking similar relief and rate correction.
According to the industry, the taxability of denatured ethyl alcohol (ethanol) was set at a concessional Basic Customs Duty (BCD) rate of 2.5% in the pre-GST regime. However, with the introduction of GST, the commodity now attracts a higher rate of 5%.
“The industry has consistently argued that the concessional rate is essential to incentivise domestic manufacturing, aligning with the government’s broader ‘Make in India’ initiative and fostering economic growth. It has submitted a detailed representation to the government,” said sources in the know of the development.
Before GST was implemented, the government had reduced the BCD on denatured ethyl alcohol imported for producing excisable goods. However, the high GST rates on denatured ethanol, widely used in manufacturing products such as nail polish, sanitisers, paints, and other industrial items, have added a significant burden to the industry.
Even post-GST, the concessional BCD rate for this product remained unchanged. The GST schedules still state that the concessional rates apply only to excisable goods. Under GST, however, only five products fall under the category of excisable goods, raising a critical question: How can imports of denatured ethyl alcohol be intended for the production of excisable goods when the scope of such goods has been significantly reduced under GST? This issue has now been flagged by the industry, sources added.
What is Entry 107?
Experts note that the controversy centres on the interpretation of Entry 107, which provides a concessional BCD rate when denatured ethyl alcohol is used in manufacturing excisable goods. This entry has remained unchanged since the pre-GST era. The question is whether its wording contains an inadvertent omission or outdated reference. Since the number of excisable goods has drastically reduced under GST, legal experts argue that a narrow interpretation of this entry could limit the industry’s access to the concessional rate, contradicting the original intent behind the exemption.
Challenging this unintended omission by the government, listed entities IOL Chemicals and Pharmaceuticals Ltd and India Glycols Ltd have approached the Gujarat High Court, seeking intervention and relief from the government. They have also challenged tax recovery notices arising from this issue.
The petitioners have argued that the central issue lies in whether the tariff entry should be interpreted restrictively, given that concessional rate benefits were originally granted in the broader public interest.
What experts have to say
Abhishek A Rastogi, founder of Rastogi Chambers and counsel for the petitioners, argued, “The fundamental question for the courts will be whether the term ‘excisable goods’ should be narrowly construed, which could effectively nullify the benefits of the concessional rate. There have already been instances of coercive recoveries by the authorities, highlighting the urgent need for a pragmatic interpretation of ‘excisable goods’ that aligns with the legislative intent behind the exemption.”
Rastogi further emphasised the challenges manufacturers face when importing ethanol: “There are specific restrictions on its use, limiting it to the production of goods classified as excisable. These restrictions create significant operational and financial challenges for manufacturers who rely on ethanol for a wide range of non-excisable goods.”
On October 17, the Gujarat High Court, presided over by Justices Bhargav D Karia and DN Ray, provided interim relief to the petitioners. The court ruled that while proceedings may continue, no final orders can be issued by the GST authorities without prior permission from the court. While this decision offers temporary relief, it highlights the legal uncertainty surrounding the taxability of denatured ethyl alcohol under GST.
Implications
The outcome of these legal proceedings is expected to have significant implications for the industry, particularly regarding customs and GST treatment of ethanol and other excisable goods. “A favorable resolution, which adopts a broader interpretation of the tariff entry, would provide substantial support for domestic manufacturers and the Make in India initiative. Conversely, a restrictive interpretation may place undue financial and compliance burdens on businesses,” claim industry experts.
“While the Gujarat High Court has granted relief to several petitioners, including India Glycols Ltd and IOL Chemicals and Pharmaceuticals, the issue continues to affect numerous importers across the country, including Laxmi Organics and Satyam Petrochemicals. These companies may need to approach appellate authorities to seek redress. Many industry experts believe that a clarification or notification from the government could resolve this issue, thereby reducing litigation, mitigating risks, and providing much-needed certainty to the industry at large,” said sources who did not wish to be named.
It remains to be seen whether the government will consider making rate changes on denatured ethyl alcohol.
