The GST Challenge for United Spirits
United Spirits Limited (USL), a subsidiary of global spirits giant Diageo, recently faced a significant GST demand notice worth ₹1.13 crore from the Kerala government. The demand, covering the period between September 2017 and March 2020, was issued under the Reverse Charge Mechanism (RCM) for establishment charges paid to Kerala’s excise authorities.
This development, disclosed in an official filing with the Bombay Stock Exchange (BSE) on January 8, 2025, highlights a growing compliance challenge for businesses navigating the complexities of GST regulations.
What is the Reverse Charge Mechanism (RCM)?
The Reverse Charge Mechanism shifts the liability to pay GST from the supplier to the recipient. In this case, United Spirits was held liable for GST on establishment charges paid to the state excise authorities, which typically fall outside the purview of regular supply chains.
Breakdown of the ₹1.13 Crore GST Notice
- Tax Due: ₹36.4 lakh
- Penalty: ₹36.4 lakh
- Interest: ₹40.6 lakh
- Total: ₹1.134 crore
United Spirits has announced plans to appeal the notice, citing a strong legal case and minimal financial implications based on its internal risk assessment.
Legal Insights: Relevant Case Laws
- Mohit Minerals Pvt Ltd. vs Union of India (2020)
- The Supreme Court clarified that under RCM, tax liability arises only if services are clearly defined as taxable under GST law.
- Ramesh Electricals vs State Tax Officer (2022)
- Emphasised that establishment charges paid to government authorities must have explicit GST applicability to invoke RCM.
These rulings suggest that United Spirits may have grounds to challenge the notice, as the applicability of RCM for such payments remains a grey area.
Impact on Businesses
Key Lessons from the GST Demand Notice
- Compliance Vigilance: Businesses must conduct regular audits of GST filings to identify potential lapses.
- Understand RCM Liabilities: Establish a clear understanding of reverse charge obligations, especially for payments to government authorities.
- Legal Preparedness: Stay updated with case laws and rulings to build a strong defense against erroneous tax demands.
Market Implications for United Spirits
The GST notice announcement had an immediate impact on United Spirits’ stock price, which fell 3.14% on January 8. Despite this, the company’s strong market presence and diversified portfolio, including brands like Johnnie Walker and McDowell’s, continue to bolster investor confidence.
What Can Businesses Do?
To avoid similar issues:
- Regular GST Training: Equip teams with updated GST knowledge.
- Seek Professional Advice: Engage with GST consultants to ensure compliance.
- Audit Vendor Transactions: Ensure RCM applicability is correctly identified and accounted for.
Conclusion
The GST demand notice to United Spirits highlights the importance of compliance in the ever-evolving tax landscape. Businesses must proactively address potential vulnerabilities in GST filings and prepare robust defenses against unwarranted demands.