 The issue of reduction in duties on wines from EU has been going on since 2007 with our government strongly opposing the reduction in customs duties. However, there seems to be a gradual thaw and reportedly it is willing to concede now, according to a report in ET. It is pertinent to note however, that the report is sourced to the Prime Minister’s Office whereas such decisions are taken by the ministry of commerce. As if this were not enough, the recycling of the news report made someone report a couple of days ago that the Prime Minister has announced that the duties are certain to be reduced!
Notwithstanding the fact that the PM usually does not make such statements, he and his government have been too embroiled in the Anna factor and the Lokpal Bill in the parliament and this issue would be currently far from his mind. In any case, the personal views and lobbyists statements apart, the government always keeps the cards close to its chest rather than making them public months in advance, as claimed by the optimists.
Not for cheap wines
Even the die-hard optimists would not bet on the treaty being signed in February, if wines and spirits were to be included in the duty reduction agenda of the FTA. However, it must be clear that the cheaper imported wines would be outside the purview of the FTA. In the past, the speculators who claim to be close to the political bigwigs, have suggested a 3-slab reduction – 150% (remaining same for cheaper wines), 100% (for medium price slabs) and 50% for the so called luxury wines. This seems to be a practical, fair and justifiable solution, for the moment. Specifically, import duties ought not be reduced on the cheap wines-say under $ 2 a bottle as this will be unfair competition for the fledgling Indian wine industry which has some serious players who will bring international fame to India in future.
The Indian industry is generally supportive of the duty reduction to 50% on expensive wines. ‘We support duties coming down on higher end wines from the current 150% but are opposed to duties coming down on very cheap wines. We believe this compromise would allow the market to grow without sacrificing the interests of our grape farmers and fledgling wine industry,’ says Rajeev Samant, owner of Sula Group and a current member of the Board of IGPB, adding, ‘We believe that the Government shares our point of view’, thereby hinting implicitly that the industry will fight tooth and nail to fight the reduction on duties on the low-end cheap wines. It would be fully justified.
Hotels are not affected
It is pertinent to point out that most hotels in any case, do not pay any customs duty on cheap, medium priced or expensive wines (subject to certain easy-to-meet criteria). The reason they are not able to increase the volumes is enormous mark-ups which they are ever-ready to defend. The FTA will have no effect on this segment which is still over 60% of the consumption, despite a constant fall in its share of the total pie- it was estimated to be over 80% about 5 years ago and will go down to around 40% when the FDI is allowed in the retail sector. With gradual liberalization of retail policies of various state governments-Delhi now allows sale in grocery stores, malls and has also reduced license fee for restaurants serving beer and wine only. Maharashtra, Chandigarh, Punjab and Haryana have seen much more liberalized policies during the same period and even earlier.
Low comprehension in government
The understanding of wine as a product is still in a stage of infancy. The health aspects of moderate wine consumption and its being an integral part of food, may take time to be assimilated by the government authorities who need wine education much more than the consumers, distributors or hoteliers. This lack of understanding about wine as a food product and the importance of quality is disturbing. According to the report, a government official reportedly said, "It is not going to affect the local industry since we do not have the grapes to manufacture the same quality of wine as Chardonnay". Unless the reporter did not hear it right, such an idiotic remark would make you laugh till tears start rolling in your eyes, because of the ignorance.
Notwithstanding the fact that a couple of wineries like Vintage Wines and the baby Fratelli have started making Chardonnay the quality of which is a lot better than many low- ended imported wines, the fact is that chardonnay wine has nothing to do with the quality of imported wines- it is just a grape. Period! Chablis, Bourgogne whites, California Chardonnay and some of their Australian counterparts-in fact most of the wine making countries including Italy make some excellent Chardonnay, but there are several other varietals that are either unique or the quality is much superior or the grapes that go into making the wine or their terroir makes them unique- like in a Barolo, Amarone, Brunello, or even a Priorat. We have not been able to grow an international variety like Pinot Noir so far. Moreover, there are lakes of cheap and boring Chardonnay which would not come close to the quality of these producers.
Our fickle and feeble government
Granting that a reliable senior official blurted out that the reduction as a certainty-for which he ought to be sacked as it would be considered an act of impropriety, one ought not to overlook the government’s propensity to change its official, announced stand often. The case of 51% FDI in multi-product retail is the recent example. After being rejected recently, the issue suddenly perked up and was suddenly accepted within a month later. The government announced it by blowing big trumpets as if Wal-Mart and Carrefour were going to help India’s economy but it swiftly made a tactical retreat in the face of political opposition. The topic has resurfaced recently with the government defending the move and testing the political waters again. Therefore, one ought to wait and watch before opening that bottle of Champagne, Cava, Prosecco, Crémant or any other bubbly to celebrate the occasion.
Excise -the kooky monster
Assuming that the import duty on medium and deluxe wines is brought down at the February meeting, one must not forget about the party pooper-excise departments in various states.
emember, when the government abolished the Additional Customs Duties in 2007 due to pressure from EU and WTO, it increased the customs duty immediately to 150% from 100% as it was within the Agreement of 1994 with WTO. The very next day, Maharashtra increased excise duty to 200%, taking it up to even 250% of assessed value, thus neutralizing the impact of reduction instantly. Delhi still continues to charge the higher duties it imposed following the Maharashtra example.
For the uninitiated, Article 47 of Indian Constitution implores the States (alcohol is a state subject) to try to enforce prohibition and gave them the independent authority of determining the sales policy of alcohol and the excise duty. Since prohibition was almost impossible to enforce- Haryana and Chennai (where the excise duty on alcohol accounts for 25% of the total state taxes) are glaring examples, the States have found a cash cow in alcohol and increase the excise duty at will to increase their revenues, rather than educate their voters about the harmful effects of excessive alcohol drinking.
What prevents them from increasing the excise duty, making it cost just as much as before, is a question no one has been able to give me a satisfactory answer. One may only wish that the FTA would force the government to only charge the agreed customs duty and settle the issue with States individually.
The Last Mile
Lastly, there is the issue of last mile costs-of importers tweaking and setting the final sales prices. There have already been rumbles from certain sections of importers that the duty reduction will not make a significant change since the duties on medium priced wines may be revised downwards by only a few hundred rupees. Recent devaluations of rupee against the dollar and euro has increased the cost of imports and these would have to be absorbed before any benefits passed to the consumer.
An FTA signed by Korea with Chile last year brought the taxes down from 68% to 53%, but there has been no decrease in wine prices to the consumer, says Cho Jung Yong, a well-known wine journalist and wine author in South Korea. ‘Theoretically, FTA should give us 15% tax reduction. However, we still have to pay gross 53% instead of 68% for the Chilean as well as EU wines,’ South Korea has signed an FTA with both Chile and EU and is expected to sign one with the US soon. ‘But importers do not reflect tax reduction. They are busy saying that they have invested a lot to build brand power and wine promotion. Thus the consumer can't feel significant price reductions. We have free changing foreign exchange rate (like India), so when Korean currency depreciates, import price of wine immediately increases.
Though the tax difference is expected to be a lot more significant than in Korea, there is a good chance the importers find this an opportune time to offset the loss due to the currency exchange during the last few months since they have not been able to pass the increase to the customers so far.
Despite all the hurdles and initial hic-cups, the positive impact of FTA and the psychological advantages are plenty and the ‘feel good’ factor ought to bring quite a few budding importers and wine marketers into the arena, increasing the choice of wines, the competition and eventually an expanding wine drinking base.
Finally, it will also be interesting to see how countries like Australia, Chile and USA react to the customs duty reduction because unless they take some drastic action they are bound to lose a chunk of the existing business to countries like France, Italy, Spain, Portugal, Germany and Austria-when the FTA with the proposed cuts finally comes into effect.
Have a great 2012!! Drink better quality wines-in moderation and stay healthy.
Subhash Arora |