Why is it in the news?

• A nine-judge Bench of the Supreme Court issued an 8:1 ruling affirming that states can tax both alcoholic beverages and industrial alcohol.
• This landmark decision is crucial for state revenues, as excise duty on alcoholic drinks serves as a significant income source. The primary issue was whether “intoxicating liquor” includes “industrial alcohol.”
• Eight judges, led by Chief Justice of India (CJI) D Y Chandrachud, supported the states, while Justice B V Nagarathna dissented, arguing for central control over industrial alcohol.

Overlapping Constitutional Entries

• The dispute arises from two overlapping entries in the Seventh Schedule of the Constitution, which defines legislative powers between the Centre and the states.
• Entry 8 of List II (State List) empowers states to regulate “the production, manufacture, possession, transport, purchase, and sale of intoxicating liquors.”
• In contrast, Entry 52 of List I (Union List) permit the Centre to regulate industries as necessary. The Centre claimed it had exclusive jurisdiction over industrial alcohol under the Industries (Development and Regulation) Act, 1961.
• However, states argued that the potential misuse of industrial alcohol to produce consumable alcohol necessitated legislative action at the state level.

The Supreme Court’s ruling carries several important implications

• Taxation of alcohol is vital for state revenues, with states frequently adding excise duties. For example, Karnataka increased the Additional Excise Duty (AED) on Indian Made Liquor (IML) by 20% in 2023.
• The decision clarifies the relationship between the Centre and states regarding industrial regulation, affirming that states can legislate on matters within the State List, even with the Centre’s extensive powers.
• The ruling overturned a 1990 Supreme Court decision in Synthetics & Chemicals Ltd. v State of Uttar Pradesh, which defined “intoxicating liquor” as only potable alcohol, thereby excluding industrial alcohol from state taxation.

Understanding Industrial Alcohol

• Industrial alcohol is an impure alcohol used primarily as an industrial solvent. It is produced through a denaturation process, where ethanol is combined with chemicals like benzene and gasoline, making it unfit for human consumption and significantly cheaper.
• This alcohol is utilized in manufacturing a range of products, including pharmaceuticals, perfumes, cosmetics, and cleaning agents.
• However, denatured alcohol can also be misused to create illicit liquor, which poses severe health risks, including blindness and death.

Defining ‘Intoxicating Liquor’

• CJI Chandrachud stressed that the entries in the Seventh Schedule should be interpreted broadly to encompass “incidental” and “ancillary” matters. He determined that the term “intoxicating liquor” under Entry 8 of List II covers everything from raw materials to the end product.
• The majority opinion asserted that even liquor not traditionally considered alcoholic might fall under this definition if it causes intoxication.
• The judgment also suggested that “intoxication” could refer to poisoning, indicating that the entry should encompass any liquor affecting health.

Dissenting Opinion and Federal Balance

• Justice Nagarathna contended that regulation should depend on the product’s nature, arguing that potential misuse of industrial alcohol does not justify its classification as “intoxicating liquor.”
• The ruling tackled the challenge of overlapping entries in the Seventh Schedule by emphasizing that the Court should choose interpretations that maintain federal balance.
• The majority concluded that “intoxicating liquor” now includes denatured alcohol and raw materials, placing them under exclusive state control.
• While Nagarathna agreed that the Centre should not regulate “intoxicating liquor,” she disagreed with the majority’s definition, maintaining that as long as ‘Alcohol’ and ‘Fermentation Industries’ remain under Centre control, state legislatures lack the power to enact related legislation.