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Five-Stars May Lose Duty Benefit On Wine Imports

Under pressure from the domestic wine lobby, and owners of non-five-star hotels and small restaurateurs, New Delhi may withdraw the customs-duty exemption scheme for five-star hotels and independent restaurateurs. Instead, the Finance Ministry is likely to ease import duties, a move that will spur sales in the retail sector, reports SOURISH BHATTACHARYYA

The customs-duty exemption extended to five-star hotels and stand-alone restaurants by India 's Ministry of Commerce is most likely to be withdrawn by the end of the 2005-06 financial year, ministry sources told

In place of the exemption, viewed as an unfair move by both the domestic wine producers and by owners of non-five-star hotels as well as stand-alone restaurants, the government is examining the possibility of marginally reducing the customs duty on imported wine. The move is expected to earn the United Progressive Alliance government the goodwill of France and Italy , two of India 's strongest European allies.

The French President, Jacques Chirac, is visiting India in February, which is also the month when Finance Minister P. Chidambaram will present the Union Budget for 2006-07. Introduced three years ago by the then Commerce Minister, Arun Jaitley, the concession spurred large-scale wine imports by hotels and some stand-alone restaurants. Opponents of the exemption are not only politically influential, but also have important backers in the government. The domestic wine producers are the most vocal opponents of the concession because it gives imported wines an unfair price advantage over local wines, which, like the rest of the alcohol beverage industry, are weighed down by steep excise duties and transport taxes. Five-star hotels, in fact, have earned the wrath of the domestic wine producers, whose articulate spokesman is the Stanford-educated owner of Sula Wines, Rajeev Samant, who, despite having a strong portfolio of imported entry-level wines, now packs his punches for the domestic lobby.

Poised to sell 1.1 million bottles in 2005-06, and having just invested in a third winery, which has taken Sula's production capacity up to 1.8 million litres, Samant knows where it makes sense to cast his lot. He's being supported by grape farmers in his home district, Nashik in Maharashtra (and lately in the districts of Sangli, Satara, Sholapur and Latur), who are switching over to wine grapes because of the promise of higher returns.

Many of them are contract farmers dependent on the fledgling wine industry. Some have invested in wine production facilities at the Maharashtra Industrial Development Corp's wine parks in Vinchur, Nashik, and Sangli. These new wine producers are finding it the hardest to get listed in five-star hotels ("even F&B managers refuse to meet them," says says Samant). The five-star hotels have been persistently accused of not passing on the benefits of the duty exemption to consumers. For long, the hotels were arguing that they were clearing old stocks on which they had paid duty at the old levels. The argument doesn't wash any longer. A foreign guest at a major five-star hotel, in fact, was complaining recently that a bottle of wine that cost 15 pounds at the UK supermarket chain, Sainsbury's, was priced at 100 pounds at the hotels. Examples like this can be multiplied.

Predictably, domestic wine producers have pressed political alarm bells in New Delhi (where their patron is the Maharashtra 's strongman, Sharad Pawar, who is also India 's Agriculture Minister) and in Mumbai, where Pawar's Nationalist Congress Party is the dominant alliance partner in a coalition led by Vilasrao Deshmukh of the Congress, which, in turn, leads the UPA dispensation in New Delhi .

Pawar was (and continues to be) the unchallenged leader of the Maharashtra 's successful sugar cooperative movement and he's said to be keen to become the messiah of the grape farmers. Pawar comes from a leading grape-growing family in the Baramati district of Maharashtra. Apart from political muscle, the domestic industry is also acquiring new allies, notably Seagram's India Pernod Ricard, which is launching its domestic wine labels (made with grapes sourced from contract farmers in Maharashtra ). Also eyeing the domestic wine market is the beer and spirits behemoth, United Breweries, owned by the media-savvy and politically well-networked Vijay Mallya, who's also a Member of the Rajya Sabha, the Indian Parliament's Upper House. Mallya has been the most influential supporter of India 's restrictive tariff regime for imported alcoholic beverages.

Vijay K. Rekhi, President, UB Group's Spirits Division, has said the market for wine in India is "gradually taking shape and can no longer be ignored." UB is said to be looking at partnership proposals from international wine companies whose identities haven't yet been disclosed. Opposition to the exemption is also growing among hoteliers in the lower-star categories and owners of the majority of stand-alone restaurants, miffed at the selective nature of the exemption. According to the scheme, announced by Jaitley in 2003, with some prodding from his good friend, Rajya Sabha MP and top hotelier, Lalit Suri, five-star hotels can now spend 5% of their foreign exchange earnings for zero-duty imports of specified products, including alcoholic beverages. (Suri, incidentally, isn't very popular at 10, Janpath, the home and headquarters of the Congress President and UPA Chairperson, Sonia Gandhi.) A year later, as a result of persistent lobbying by the National Restaurant Association of India , Jaitley extended the scheme to restaurants. The amount was limited to credit card payments and, only after nationwide criticism, Jaitley raised the percentage from 5 to 20. The concession didn't amount to much, because foreign guests at stand-alone restaurants rarely pay by credit card, and unlike hotels, they don't have multiple channels of foreign exchange earnings. Most restaurant owners didn't sign up for the benefit and those who did, benefited just marginally. Says Ritu Dalmia, chef-owner of Delhi 's Diva restaurant, the second restaurant in the country to get Wine Spectator 's coveted Excellence Award, "The exemption helps me cover only 50% of our wine imports."

With the groundswell against the duty exemption growing, the remaining days of fiscal 2005-06, which closes on March 31, are likely to see heavy imports by beneficiaries of the concession. The predicted marginal reduction in the burden of customs duty is most definitely going to spur wine sales at liquor vends because prices will come down. All signs point to only one direction: The future upward movement of the imported wine market will definitely be powered by the retail sector. But - as always, you can't talk about things Indian without adding qualifiers - most states don't let retail outlets sell imported wine. What certain, though, is that five-star hotels can't expect their party to last forever.

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