Levy of VAT on Indian liquor sold by hotels in Tamil Nadu is constitutionally valid

Levy of VAT on Indian-made liquor sold by hotels/clubs is constitutionally valid, irrespective of the fact that VAT has been imposed without giving benefit of set-off of tax-suffered turnover at the time of purchase. It is so since liquor is non-vatable goods and provisions imposing non-vatable tax on goods has not been challenged.

Background of the case:

(1)   Hotels and clubs were paying Tamil Nadu VAT on foreign liquor sold by them to their customers. However, no tax was payable on sale of Indian-made-liquor by them to their customers.

(2)   A tax had been levied in 2012 on sale of Indian-made-liquor by hotels and clubs to their customers.

(3)   This tax had to be paid upon total turnover arising on sale of such liquor without any set-off of tax-suffered turnover at the time of purchase.

(4)   Hotels and clubs purchase Indian-made-liquor from Tamil Nadu State Marketing Corporation Limited (“TASMAC”, a State’s instrumentality) after payment of tax. TASMAC has the benefit of paying tax on turnover after setting off tax-suffered turnover at the time of purchase. However, hotels and clubs have no such benefit.

(5)   It was argued by the hotels and clubs that there could not be taxation of entire turnover. It placed fetters on the right of the petitioners to carry on their own business. Therefore, there was violation of Article 19(1)(g).

The High Court held that:

(1)   The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are,therefore, to be read along with the said qualifications.

(2)   Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is res extra commercium, being inherently harmful. A citizen has, therefore, no fundamental right to do trade or business in liquor. Hence, the trade or business in liquor can be completely prohibited.

(3)   The State can create a monopoly either in itself or in the agency created by it for the manufacture, possession, sale and distribution of the liquor as a beverage and also sell the licences to the citizens for the said purpose by charging fees. This can be done under Article 19(6) or even otherwise.

(4)   The petitioners made considerable profit by the escalation of sale price. The petitioners were making considerable value additions to their sales in favour of their customers.When the petitioners were selling liquor at a higher price than the TASMAC, they could not seek parity.

(5)   Liquor is specified as non-vatable item. Provisions as to tax certain goods treating them as non-vatable have not been challenged [Section 3(5) and Second Schedule].

(6)   The petitioners, who are clubs and hotels, cannot be compared with the retail outlets of TASMAC. The customers of the TASMAC and the petitioners form two distinct and different categories based upon their respective socio-economic status. The petitioners are not prevented from doing their business. Thus, there is no violation of Article 19(1)(g) - Hotel & Bar (FL.3) Association of Tamil Nadu (HOBAT)v.Secretary to Government, Commissioner Taxes Department [2015] 60 taxmann.com 75 (Madras).