Bangalore: India, the world’s biggest whisky market, plans to accept the European Union (EU) and US demands to cut taxes as high as 550% on imports of liquor in the next month, before the World Trade Organization (WTO) examines the dispute.
WTO last month agreed to rule whether India’s tariffs on wines and spirits are illegal after EU objected.
The US on 25 May filed a similar complaint against “excessive” levies.
“We are in the process of realigning our duty structure as we are part of the WTO agreement,” said commerce secretary G.K. Pillai in a phone interview from New Delhi on Monday. “The process has already started. It will be over in a month.”
Bound by WTO norms, India is committed to extend national treatment to imported liquor. This means that the duty on imports cannot be at a variance to the levy on the same product manufactured locally. By deciding to do the needful before the ruling is announced, India is mitigating the fallout that would ensue in losing such a high-profile trade dispute at the WTO.
At the same time, as reported in Mint on 8 March, the government, while withdrawing the additional customs levies, is proposing to empower states to levy countervailing duties on imported wines and spirits. It will do so by introducing a legislation under Article 253 of the Constitution. If it does so, then the effective duties on imported wines and spirits may not drop to the extent of the reduction in additional customs levies by the Central government.
The duty cut will enable Diageo Plc. and Pernod-Ricard SA to increase sales in India where the fastest wage growth in Asia gives consumers more to spend on wines, gins and whiskies. India will be among the top five fastest-growing markets for the next four years, market research body Euromonitor International said.
“India will have to adhere and be compatible” with WTO rules, said R. Venkatesan, senior fellow of independent economic research body, National Council of Applied Research, in a phone interview from New Delhi. “As duties come down, the market will open up for Scotch whisky and foreign wines. Price is one factor why consumption of foreign liquor is low.”
India’s spirits market, comprising whisky, rum, brandy and vodka, grew at an average annual rate of 8.3% to 1.96 billion litres in five years to 2006, according to Euromonitor. The sale of wines rose 17.7% annually from 2.4 million litres to 5.4 million litres in the same period, it said.
“Though per capita consumption remains less than a teaspoon-full, market sizes of wine have more than doubled from 2001 to 2006 in India, while the growth is comparatively slower in China at 41% over the same period,” Yvonne Kok, research analyst at Euromonitor, said in an emailed statement.
Consumption of spirits is forecast to grow, in a country of 1.1 billion people, at an average annual rate of 8.5% to reach more than 2.5 billion litres by 2011. The wine market in the same period is projected to grow 14.5% annually to 10.5 million litres, the London-based body said.
Still, cutting taxes will allow cheaper foreign wines to be sold in India, hurting the nation’s nascent domestic industry, said Abhay Kewadkar, chief wine maker of United Spirits Ltd, a unit of billionaire Vijay Mallya’s UB Group.
“The moment the duties are reduced, India will become a dumping ground for cheap quality wines and spirits,” Kewadkar said in an interview in Bangalore, where the company is based. “The government could keep duties high for cheap quality wines and for more quality wines, it can be reduced drastically.”
United Spirits is spending Rs75 crore to build a wine making unit near Mumbai.
Champagne Indage, the top domestic wine maker in which billionaire Anil Ambani has a 9% stake, tops sales in India with a 23% share of the volumes in 2004. Samant Soma Wines Ltd and Grover Vineyards followed with 11% and 10%, respectively, the research body said. Seagram India, a unit of Pernod-Ricard, set up a winery in the country in 2006. Diageo, with brands such as Smirnoff, Johnnie Walker and Beaulieu Vineyard, is “currently exploring opportunities” for joint ventures with Indian companies, spokeswoman Michelle D’Zouza said in an emailed statement.
“These foreign companies have huge pockets. They may increase the size of the market through promotions,” Kapil Grover, director of Grover Vineyards, said. “At the same time, we have our fears also. If the government agrees to the EU demands, the impact will be huge.”
Overseas liquor makers disagree. Taxes on liquor, such as excise duties and sales tax, are decided by the states and the Union government can only suggest broad policy guidelines.
“We do not believe in the statement that the Indian market will be flooded by cheap spirits and wines once duties are cut,” Sunil Mehdiratta, the New Delhi-based spokesman for the Scotch Whisky Association in India, said in an emailed statement. “With a basic customs duty of 150% on spirits and 100% on wines, international brands can never compete with local products.”
Taxes aren’t the only barrier to selling liquor in India. In Gujarat, birthplace of Mahatma Gandhi, alcohol is banned. Tamil Nadu and Kerala have banned local brews. During elections, national holidays and some religious holidays, the sale of liquor is prohibited.
“What we are saying is that there is a whole variety of indiscriminate duties,” said P.I. Suvrathan, secretary, ministry of food processing, in a phone interview from New Delhi.
“As we are part of WTO, there is some pressure on the states to reduce taxes. We are telling them not to discriminate between Indian and foreign liquor. It is a suggestion. Some states are taking action.”
A Mint staff writer contributed to this story.