Liquor Trade: The Test of Federalism

The current lockdown that has been imposed has led states to lose out on revenue from inter-state and intra-state trade in the form of SGST, VAT, excise duties etc. States can foresee large losses given the spread of COVID-19 and the slow decrease in the number of positive cases.

In such a scenario, what is striking is the lack of active economic measures on the part of the Union government or the state governments, to recover or at the least initiate the process of economic revival. The instant article aims at testing the vires of the Executive Orders issued by Ministry of Home Affairs (MHA) under the Disaster Management Act, 2005 (DMA), both from the perspective of jurisdiction, as well as that of rationality/reasonableness of prohibiting ‘sale’ of liquor.

The MHA on April 24 issued an Order (Amendment Order) under Section 64 of the DMA, which was in continuation and amendment of its earlier, more elaborate order passed on April 15 (Extension Order), which extended the nationwide lockdown till May 3.

Immediately after publishing the Amendment Order, the MHA, in a press release, clarified that the sale of liquor shall continue to be prohibited, as specified in the Extension Order.

The aforesaid orders of the MHA being in the nature of an executive action by the Union government, is amenable to the test of manifest arbitrariness as laid down in Shayara Bano v. Union of India & Ors. However, this article focusses on the state government’s right to control trade of liquor under the Constitution, and whether the same is invalidly infringed.

Jurisdiction

The current assessment is limited only to “potable liquor” or “intoxication liquor” comprising extra neutral alcohol (ENA), thereby not factoring in categories of alcohol that are poisonous, toxic and fatal for human consumption including Isopropyl alcohol or Methyl alcohol.

Accordingly, Entry 51 of the State List under Schedule VII of the Constitution empowers each state to regulate and impose duties, excise and such other forms of levies, as it may deem fit, pertaining to “alcoholic liquors for human consumption”.

This position has been fortified by the Supreme Court, recently in State of Jharkhand v. Ajanta Bottlers & Blenders (P) Ltd which relies on Har Shankar v. Excise & Taxation Commissioner, to hold in unequivocal terms that the state government/legislature is empowered to legislate on aspects of liquor trade, including but not limited to, manufacture, storage, export, possession and sale of portable alcohol, which is fit for human consumption.

The exclusive jurisdiction of the state Government over subjects enumerated under the State List is established under Article 246(3) of the Constitution, which effectively prohibits the Union from exercising competence over the said subjects.

Further, Article 73 read with Article 298(a) of the Constitution establishes that any executive action taken by the Union, pertaining to an item that is specifically within the domain of the state under the State List, shall be subject to the state Legislation over the said item.

The Union List on the other hand, does not deal with epidemics, public health or alcohol. Rather it is the Concurrent List, which at Entry 29, lists prevention of spreading contagious disease from one state to any other, as a subject. Entry 97 of the Union List creates scope for residuary powers, but with the clarification that it applies to those subjects that are not covered under Lists II and III of Schedule VII.

It is further clarified that the constitutionality of the DMA or the Epidemic Diseases Act, 1897 (EDA) passed by the Parliament is not in question, rather it is the executive direction taken under the garb of the DMA, which is being tested for jurisdiction and arbitrariness herein.

The Central government has been given a wide range of powers under the DMA to prevent damage and to mitigate disasters. These provisions include Sections 10, 35 and 62, which broadly empower the Centre to take all or any such measure as may be expedient to control a disaster.

It is pertinent to note that simultaneous powers with the same object have also been provided to state governments at Sections 18, 22 and 38. However, they are subject to rules, guidelines and policies issued either by the National Authority, the National Executive Committee or the Central government. In other words, the state’s powers under the DMA are subject to the supervision and control of the Centre.

Federal Structure Doctrine

By way of background, it is pertinent to understand whether the different lists for the Union and the state governments forms part of the basic structure of the Constitution or not.

The most important acknowledgement of the fact that the separate and concurrent powers accorded to Union and States is denotive of the quasi-federal structure of the Indian Constitution and that the same forms part of the basic structure, can be observed in the decision of the Supreme Court in SR Bommai & Ors. UOI & Ors.

This decision, though, is in the context of invocation of an emergency under Article 356 of the Constitution, and whether the exceptional powers granted to the Union thereunder, shall be amenable to judicial review or not. But for the present analysis, it is pertinent to first reproduce what has been held as regards federalism forming part of the basic structure of the Constitution, which at para 96 provides as follows:

“Democracy and federalism are the essential features of our Constitution and are part of the basic structure….The power vested de jure in the President but de facto in the Council of Ministers under Article 356 has all the latent capacity to emasculate the two basic features of the Constitution and hence it is necessary to scrutinize the material on the basis of which the advice is given and the President forms his satisfaction more closely and circumspectly.”

It is therefore clear that encroachment upon a state’s power in the absence of a specific Constitutional provision to that effect, shall render any such activity as violative of the basic structure.

Articles 249, 250, 252, 253, 356 and Entry 52 of List I are such exceptions whereby Parliament is permitted to legislate is the State sphere.

The question, therefore, that requires determination is whether the Union can, by way of an executive act, encroach upon an exclusive domain of the state government that is granted to it under List II of the Constitution, without any of the exceptions as recognised under the Constitution arising, or for that matter in the absence of invocation of an emergency under Article 356 of the Constitution.

Another question that follows is what is the sanctity of Entry 51 in List II, if the Union is permitted to indirectly encroach upon a subject that it has no dominion over, and cannot directly act upon?

The Supreme Court in Shri KC Gajapati Narayan Deo v. State of Orissa has clearly held, although in the context of colorable legislation, that Parliament cannot indirectly legislate on an entry which is within the exclusive domain of the state legislature, as the same shall be violative of the Constitutional scheme.

In the context of executive actions as well, the same principle shall be applicable, and the Union Executive, apart for exceptional circumstances, cannot exercise jurisdiction over exclusive state subjects. The encroachment although may have a reasonable basis, which is assessed in the next segment of this article, does not have a specified basis for it in the Constitution.

The state would be at liberty to invoke the original jurisdiction of the Supreme Court by filing a suit under Article 131 of the Constitution, as this pertains to questions of federalism. In this context, the Supreme Court in Union of India v. State of Rajasthan has held as follows:

“…we feel that Article 131 of the Constitution is attracted only when a dispute arises between or amongst the States and the Union in the context of the constitutional relationship that exists between them and the powers, rights, duties, immunities, liabilities, disabilities etc. flowing therefrom.”

Therefore, in the given financial predicament of the states, they should be allowed to earn their revenues, as the same is also a challenge that the epidemic poses. An injunction in this regard is moot. However, agitating this issue is imperative, given that there is no basis to say that states are incompetent to administer liquor trade or that the Union is better equipped if liquor trade is prohibited.

Proportionality of Prohibiting Liquor Trade

In the Amendment Order passed on April 24, sale of liquor has been prohibited, fearing, overcrowding or increased movement of people in and around liquor stores and a consequent violation of social distancing norms.

It is pertinent to understand the difference between challenging the vires of an executive action from a fundamental right perspective vis-à-vis from the perspective of a state asserting violation of its right, by the Union, as granted to it under the Constitution.

For the purpose of the present article, the federal issue is being analysed from the perspective of the state’s right to invoke Article 131 and the grounds thereof. Although the state shall not invoke Article 14, however the grounds of invalidating an executive action shall remain the same, i.e. arbitrariness.

The state, apart from asserting just jurisdictional incompetence, shall also be in a position to plead excessiveness, irrationality and being without a determinable principle in the suit. This is to say that arbitrariness is a rather composite argument.

The doctrine of proportionality is a four-pronged test, as laid down by the Supreme Court in Modern Dental College and Research Centre & Ors. v. State of Madhya Pradesh & Ors., which tests for irrationality, excessiveness and being with or without a determining principle. This has been followed recently in IMAI v. RBI .

The four-pronged test requires determination of the following:

(i) that the measure is designated for a proper purpose;

(ii) that the measures are rationally connected to the fulfillment of the purpose;

(iii) that there are no alternative less invasive measures; and

(iv) that there is a proper relation between importance of achieving the aim and the importance of limiting the right.

The above test is not stricto sensu applicable to the states to urge under Article 131. However, in principle, it can be referred to showcase unreasonableness of the prohibition. There is no legitimate expression of the intent behind the prohibition but for the all-encompassing object of mitigating the disaster at hand, for which powers have been granted under the DMA to the Union.

Permitting non-essential shops in a de-contained zone, while rendering liquor at a pedestal even lower than that of non-essential commodities, arguably renders the prohibition an act without a determining principle. Drawing a nexus between the object sought to be achieved vis-à-vis its interface with the prohibition, is also complicated because it is not clear as to how prohibiting liquor trade in any form or manner will or will not mitigate the disaster at hand.

Further, with respect to the third test, it is imperative to note that a lesser alternative that could have been explored was delivery through providing a license under respective excise statutes of the states, to already available e-commerce delivery companies such as Dunzo, Swiggy, Zomato etc., that are providing essential items to people’s doorsteps.

A complete prohibition should have been arrived at only subsequent to a consultative discussion with the states.

Lastly, owing to the foregoing observations, it is difficult to correlate the limiting of a state’s right to earn revenue in the form of excise and duties from sale of alcohol to that of achieving the aim of mitigating the disaster. A thriving black market, allowing bootleggers to sell alcohol would further create a burden on the state to control loss of revenue thereof.

Conclusion

Alcohol has been rendered as res extra commercium (outside commerce) by the Supreme Court in Khoday Distelleries Ltd. & Ors. v. State of Karnataka & ors, meaning thereby that businesses cannot assert a fundamental right to trade in liquor, under Article 19(1)(g).

However, from the perspective of protecting the federal structure, states do have plenary jurisdiction over liquor trade, and for that to be impinged, is certainly a case for consideration.

It is understandable that the Central government is under tremendous pressure to deal with different facets of the epidemic. However, that is why decentralization of administrating the situation is more important now. Police and hospitals are also state subjects, which can be burdened in light of an illicit trade that shall continue.

The author is Srijan Sinha, and Advocate practicing before the Supreme Court.