States can regulate industrial alcohol

Context:  A Constitution Bench of nine judges in an 8:1 majority judgment has upheld the State legislatures’ right to regulate industrial alcohol. (State of U.P. vs. M/s. Lalta Prasad Vaish)

The majority opinion held that the phrase “intoxicating liquor” in Entry 8 of the State List in the Seventh Schedule of the Constitution would include industrial alcohol within its ambit. 

Background: Entry 8 gives States the power to regulate the production, manufacture, possession, transport, purchase, and sale of “intoxicating liquor”. Various States had challenged the Centre’s position that it had exclusive control over industrial alcohol, a power held under Entry 52 of the Union List.

Key issues: Can “intoxicating liquor” also be defined as “industrial alcohol”?

• There are two “overlapping” entries in the Seventh 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,” whereas 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 the public interest”.
• As alcohol and other products of fermentation industries that deal with non-drinkable alcohol are included in the Industries (Development and Regulation) Act, 1951 — 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.

The key question of Law: Whether a central law, the Industries (Development and Regulation) Act (IDRA), 1951, which listed ‘fermentation industries’ as a scheduled subject on which the Union government could exercise control, had the effect of removing ‘industrial alcohol’ from the regulatory purview of State governments.

Judgment: The ruling 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 (drinkable) alcohol and, therefore, states could not tax industrial alcohol.

Outcomes of judgment

• Increased amount of taxes/revenue: The tax levied on alcohol is a key component of a state’s revenue. With the inclusion of industrial alcohol, states would be able to regulate it accordingly. The additional taxes accruing would be used for funding essential public services.
  • This judgment along with the recent judgment in which the SC ruled that States can tax mineral rights and mineral bearing lands is going to boost the State’s  revenues further.
• Clarity on Centre-State Relations: It also clarifies Centre-state relations regarding control over industries. The 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.
• Maintaining federal balance: It affirms the principle that when a Central law (Section 18G of Industries Development and Regulation Act, 1951) accidentally steps into areas controlled by the State Governments, the States should not lose their power over those areas, this principle has been respected in this case by checking legislative competence of Centre and maintaining federal balance.
• Regulatory clarity: Judgment would bring regulatory clarity over the taxation, which would prove to be positive for manufacturers.
• Improved law and order: More powers with respect to regulation and taxation would lead to better checks on the leakage of industrial liquor, which is often used for making illicit liquor responsible for deaths due to it.