Whisky Proof Against Tax In India

by Mary Swire, Tax-News.com, Hong Kong

30 January 2002

A trade dispute is brewing between India and Western government over high levels of excise duty and tax levied on imported spirits, which can reach a total between 470% and 710%.

The Indian government agreed under the 1994 Uruguay Round to scale back spirit import duties from 210% in April 2001 to 150% by 2004, but has not so far begun to do so. Now, after western companies threatened to take India to the World Trade Organisation for breaking its promises to reduce import duties, a senior official said that a cut would be included in next month's budget. "The necessary changes in the import tariff structure will be made at the time of the [February] budget so that it is compliant with WTO rules," the official said.

Asked why the cuts had not been implemented last April, the official told the Financial Times that the failure was a "technical slippage". He denied suggestions that the new state tax was restraining import sales to protect domestic producers, calling for detailed evidence to the contrary.

British trade officials said while it welcomed India's agreement to cut import duties, it still had to address the state tax issue. "The Indians have led us to think they will bring down import duties," said a UK trade official. "But on the state tax, this is the bigger issue for us. It is fair to say that in the European Commission's opinion, it is discriminatory." He said that unless both tax issues were addressed, the industry might ask the Commission to investigate under its Trade Barriers Regulation - a first step towards deciding whether to file a complaint to the WTO.

In turn, the Indian government accuses Europe and the US of protecting its own industry by barring Indian-made whisky, which is banned from trading as "whisky" because it is made from molasses, not grain. But the UK trade official brushed this aside, saying that potential Indian exports were negligible compared with the potential for western spirits in India. "At best, Indian whisky would be a niche product," he said.

The motives of the Indian government for imposing such high taxes are to raise revenue, to protect local industry, and for health reasons, presumably in that order. But a recent report showed that in delhi at least, imported whisky is proof against virtually any level of taxation. Sales figures indicate that the city’s attempts to promote wine and beer notwithstanding, whisky continues to find favour with the city's drinkers.

Delhi consumes roughly 85,000 cases of whisky each week, while the intake of rum normally never exceeds 65,000 cases per month. Said an excise official: "Vodka and gin are nowhere near whisky and rum, but both — backed by upward sales curves — have reason for cheer. Sales of vodka crept up from 3,600 cases in October to 3,900 cases in November to 5,000 cases in December 2001. Then, around 6,300 cases of gin were sold in December as against the November 2001 figure of 5,300 cases." Wine sold a mere 625 cases in December 2001.

"Whisky’s dominance of the liquor market is a countrywide phenomenon," points out Srikant Illuri of Allied Domecq, "The market for white spirits is opening up, but there is no reason to expect a dramatic change in consumption patterns in the short run."

The Delhi government’s attempt to wean customers towards ‘softer’ drinks hasn’t really paid off. "It is part of our liberalised excise policy to promote wine and beer, but since there is a preference for whisky, we are trying to supply the best brands in the market," says Delhi finance minister MS Saathi." Hmmm.

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