What is intoxicating liquor and industrial alcohol?

Recently , A nine-judge Bench of the Supreme Court held in a 8:1 ruling that states have the power to tax not just alcoholic beverages, but also ‘industrial’ alcohol.

The key interpretative question before the court was whether “intoxicating liquor” can be defined to also include “industrial alcohol”.

Eight judges — ruled in favour of the states.

Justice B V Nagarathna in her dissenting opinion held that the power to regulate industrial alcohol should be with the Centre.

‘Overlapping’ entries:

• The core of the dispute arises from two “overlapping” entries in the 7th Schedule of the Constitution, which lays down the division of lawmaking powers between the Centre and the states.
• Entry 8 of List II (State List) gives states the power to regulate “the production, manufacture, possession, transport, purchase and sale of intoxicating liquors”, while Entry 52 of List I (Union List) allows the Centre to regulate industries as a whole to the extent “declared by Parliament by law to be expedient in public interest”.
• As alcohol and other products of fermentation industries that deal with non-potable (non-drinkable) alcohol are included in the Industries (Development and Regulation) Act, 1961 — a law passed by Parliament — the Centre argued that it “occupied the field” when it comes to industrial alcohol, and that states could not regulate the subject.
• States, on the other hand, argued that industrial alcohol can be misused to produce consumable alcohol illegally, which required them to enact legislation.

Upshot of SC decision:

• The tax levied on alcohol is a key component of a state’s revenue, with state governments often adding an additional excise duty on alcohol consumption to further drive up incomes. For example, in 2023, Karnatakaraised the Additional Excise Duty (AED) on Indian Made Liquor (IML) by 20%.
• In addition to the impact on the ability of states to generate revenue from alcohol, the verdict also provides clarity on Centre-state relations when it comes to control over industries. Wednesday’s judgment affirms the power of states to pass laws on subjects in the State List, even in the face of the wide powers granted to the Centre regarding the control of ‘Industries’ as a whole.
• The ruling also set aside the SC’s 1990 judgment in Synthetics & Chemicals Ltd. v State of Uttar Pradesh, which held that “intoxicating liquor” refers only to potable alcohol and, therefore, states could not tax industrial alcohol.

 Industrial alcohol:

• Industrial alcohol is essentially impure alcohol that is used as an industrial solvent. Mixing chemicals such as benzene, pyridine, gasoline, etc. in ethanol, which is produced by fermenting grains, fruit, molasses, etc., — a process that is called ‘denaturation’ — turns it into industrial alcohol. This makes the alcohol unfit for human consumption, and significantly lowers its price.
• Industries use this impure alcohol to manufacture a range of products including pharmaceuticals, perfumes, cosmetics, and cleaning liquids.
• However, this same industrial or denatured alcohol is sometimes used to make illicit liquor, cheap and dangerous intoxicants whose consumption poses severe risks, including blindness and death.

‘Intoxicating liquor’

CJI Chandrachud held that entries in the Seventh Schedule must be given a “wide meaning”, and be deemed to include “incidental” and “ancillary” matters related to the entry in question.

He then applied this rule to the expression “intoxicating liquor” under Entry 8 of List II, holding that the “Entry seeks to regulate everything from the stage of the raw materials to the consumption of ‘intoxicating liquor’.”

The majority opinion, authored by the CJI, held that “…even liquor which colloquially or traditionally is not considered as alcoholic liquor may be covered by the phrase ‘intoxicating liquor’ if it produces the effect of intoxication”.

The judgment rationalised this by finding that the word “intoxication” can also refer to poisoning and not just inebriation, indicating that the purpose of the expression “seems to be [to] enhance the scope of the Entry to cover liquor which has an impact on health”.

Justice Nagarathna on the other hand, found that the deciding factor must be the “nature of the product” consumed. “Merely because there can be a potential misuse of “industrial alcohol”, for example, by converting rectified spirit (“industrial alcohol”) as a beverage which has an intoxicating effect, Entry 8 – List II cannot be stretched to include such “industrial alcohol”,” the dissent noted.

The ‘federal balance’

• Two interpretations are possible when two entries in the Seventh Schedule are ‘overlapping’: either states can be given the power to regulate intoxicating liquor, or Parliament can be allowed to take complete control of the intoxicating liquor industry by passing a law under Entry 52 of List I.
• To address this, the majority held that “When there are two possible interpretations of the entries, the Court must choose the one that maintains the federal balance”.
• The ruling then held that intoxicating liquor under Entry 8 — which now includes ‘denatured’ alcohol and the raw material for alcohol production — falls within the exclusive control of states. It held that the Centre cannot regulate matters concerning intoxicating liquor under Entry 52 as this would result in “rendering Entry 8 fully redundant”.

While Justice Nagarathna agreed that the Centre and Parliament could not enact laws to regulate “intoxicating liquor”, she disagreed on what can be included under this tag. While the majority opinion held that “intoxicating liquor” includes industrial or denatured alcohol, Justice Nagarathna came to the opposite conclusion.

The dissent reasoned that so long as ‘Alcohol’ and ‘Fermentation Industries’ remain as industries where the Centre can exercise complete control under the Industries (Development and Regulation) Act, 1961, “state legislatures are denuded of their powers to pass a legislation or to take any action” relating to them.