United Breweries (UBL), which makes beer under the Kingfisher brand, is liable to pay an 18% GST on 'surplus profit' received from beer manufacturing units contracted by it to make and sell alcohol beverage under its brand name, a ruling passed by Authority of Advanced Ruling (AAR) in Karnataka said.
United Breweries (UBL), which makes beer under the Kingfisher brand, is liable to pay an 18% GST on ‘surplus profit’ received from beer manufacturing units contracted by it to make and sell alcohol beverage under its brand name, a ruling passed by Authority of Advanced Ruling (AAR) in Karnataka said.
The order is likely to dent the profit of UBL as the tax would be inadmissible as input tax credit because potable alcohol is outside the GST ambit. “This payment of 18% GST on collections made by brand owner from brewery would burden the supply chain with additional tax. This tax payment would be non-creditable as the final product i.e. potable alcohol is outside the ambit of the GST,” Rajat Mohan, partner at AMRG & Associates, said.
Beer under the brands owned by UBL is manufactured by contract brewing/bottling plants (CBU), which also supply the product in the market. CBUs retain a part of profit from beer sales and pass on the ‘surplus profit’ to the brand owner.
UBL had approached the AAR to clarify GST applicability on profit earned by CBUs and its own share of sales proceeds. The authority concluded that CBUs are not engaged in supply of service to the applicant (UBL) and hence there was no liability to pay GST on the amount retained by CBUs as their profit.
However, the AAR said since the applicant receives money from CBUs, this amount has to be in lieu of some ‘supply’. “It is thus beyond doubt that the applicant is engaged in supply of service to CBUs for which money is received and called as brand fee and business surplus,” the ruling said. It added that GST would be payable by the brand owner (UBL) on ‘surplus profit’ received from CBU at 18%.
The authority considered the business model of UBL, which reveals that the firm provides technical know-how to breweries, including close supervision of procuring and manufacturing processes, and breweries in turn manufacture beer of the requisite standards.
Further, procurement of raw materials, packaging materials, incurring of overheads and other manufacturing costs are incurred by CBUs. The revenue sharing agreement stipulates that apart from input cost in making beer, the brewery would be entitled to a fixed sum. The balance left over after deducting all the cost, including statutory dues and taxes, will be pass on to UBL.