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Delhi Wine Club
Blog: Rolling Back the Customs Duty Benefits to Hotels

Posted: Tuesday, 06 August 2013 13:27

Blog: Rolling Back the Customs Duty Benefits to Hotels

August 06 : It’s a universal perception in India that the hard lobbying by 5-star hotels to get the customs duties waived on the import of wines and spirits based on their past ‘export’ performance a decade ago, ostensibly to boost incoming tourism, has completely backfired with the unfair gains going to the hotels but it may not be advisable to bring these products under the duty regime, cautions Subhash Arora in response to a section of people suggesting that this special treatment be withdrawn due to the wide misuse of the indulgence by the government

According to the concessions extracted by the hotel industry through the Federation of Hotel and Restaurant Associations of India in 2003-4 from the Commerce Ministry, the profit margins chargeable on wine are to be under 250% (for liquor it is 400%). Per the Directive of the Ministry of Commerce and Industry communicated to the members in April 2004, which is perhaps gathering dust or is all but forgotten, the hotels were to bring in line the prices of wine and liquor in the outlets of the hotels. Though most claim they are following the directive, I have openly challenged any hotel to prove that they are following the spirit of the directive. There is more than one way of hoodwinking and the finance departments which are generally smarter than lawyers when it comes to manipulating figures, are always steps ahead of the lawmakers or the customers. It is beyond our purview to list them or even scrutinize them as a policy.

We are also very sympathetic to the hotels because of the illogically high license fees and hidden costs at every step of the way (the term sin tax is not openly bandied about in India yet but is pretty much in existence) thus adding to the overheads but the logic of keeping beverage costs at around 16-20%  is not logical. The hoteliers and their sympathizers claim that it is their free will how to price the wines, spirits and any product including colas and mineral water (which had become a contentious issue a few years ago until the courts sided with the hotels claiming that they added value to serving water by offering an experience and a special ambience). They coolly ignore the fact that they had been granted the concessions to pass on the benefit to the tourists to encourage tourism. Most tourists are always very cut up about the horrendously high prices of wine at the hotels where they stay.

Throwing out the baby with the bath water

Many people suggest that the benefits should be withdrawn. Let’s not take the approach of throwing out the baby with the bath water or cutting off the nose to spite the face. We all know that the wine sales would increase significantly if the prices were more reasonable. It is also a known fact that the hotels do the accounting jugglery and keep records that show the prices generally within the range. But the amount of concessions they squeeze out of the distributors is arguably credited in other heads and the costing on paper remains much higher, resulting in overall higher than permitted list prices.

It should also be appreciated that the frontline managers - the F & B staff - fully understand that the sales cannot be pushed beyond a certain point at the existing prices but they are obliged to work within the dictum of the finance departments that are vocally uncomfortable if the beverage price gets more than 20% (meaning 500% profit margin). Many of them are always scratching their heads to find a solution. A new expat General Manager of a 5-star Hotel I know, spotted the problem of over-pricing and low wine sales immediately on joining and is reportedly revamping the entire wine list to control the inventory and reduce the prices to a comfortable level to encourage the customers to buy wine. If he is able to drill some common sense into the finance department (in my utopian world, every finance person would be given a crash wine appreciation course when he joined a hotel), we shall soon see the results.

Every hotel would tell you stories like a wine that was purchased at Rs.40,000 and being sold at Rs.95,000. One day an affluent connoisseur (name withheld) walked in with corporate clients and ordered all the 7 bottles they had in stock, but that is not a daily or weekly affair. It’s the average customer walking in and ordering a glass of wine with food (assuming he imbibes alcohol) that would add to the number of bottles consumed and help improve the wine culture, not our friendly industrialist whose company would bear the costs.

A passing mention must also be made of a commendable job a majority of the hotels are doing with their unlimited Sunday brunches. It is anyone’s guess how long they would last but at Rs.2650+ at the OTW and Rs.3500 at most of the other 5-star hotel restaurants in Delhi, they offer a fabulous opportunity to taste and enjoy a wide variety of champagnes and wines at amazingly low prices. Although they are an exception to the rule of overcharging, their consumption figures at these brunches may also give an idea of how much sales can be increased with reasonable prices.

Indian Wines

Although one may legitimately question the logic of runaway pricing for hotels overcharging on the concessional purchases, there can be no such compulsion for Indian wines which may be sold at any price (free economy and all!). Check out any hotel list and you will find the 20% formula applied meticulously for Indian wines as well. In fact, the VAT we pay to the hotel covers the cost of the whole bottle-the total sales receipt goes to the gross profits. As an example, a typical Indian wine sells for Rs.500 with VAT (About Rs.415 without VAT). The net price to the hotel is around Rs.350. The same wine could be listed at Rs.2500-2800 plus taxes. The VAT of over Rs. 500 on these wines they sell, covers the cost of the bottle and the mark up is over 600%. I have always longed for someone to point out the arithmetical error in my calculations. But nobody has ever to come to me on that one.

This is well within their scope to charge any price. Perhaps, they are not interested in promoting Indian wines! One can justifiably argue that they are buying at the market price and can charge whatever they like and one cannot fault them on that. But what the Indian producers ought to be doing (through IGPB, perhaps) is that they should lobby with the government and the hotels must be restricted to a profit of 250% mark up for Indian wines as well - as a part of the package of allowing duty free imported wines. Their reasoning should be - the tourists are keen to taste Indian wines and a bigger Indian wine list at lower prices would induce them to try at least a bottle on different occasions. Rather than going through the futile and undesirable exercise of withdrawing the Duty Free benefits, they should link the pricing of Indian wines with the same formula. Some producers privately opine that a certain percentage of the hotel sales must be compulsorily that of a minimum of Indian wines - a point worth looking at.

Suggested Pricing Policy

I am not at all of the opinion that the government should withdraw these benefits and make the whole industry collapse. With the government considering banning the non-essential item import, it might in its collective wisdom decide to ban the import of wines (though I hope the WTO Agreement would discourage it from taking such a drastic step as also the ongoing FTA with EU) - it would kill the wine industry (repetitive message intended). The government should consider limiting the profit margin on the imported wines to 150-200%, based on the MRP/WSP declared to the excise in Delhi (similar formulae can be easily worked out for other states since this would be monitored by the industry and commerce ministry). The hotels may negotiate to whatever extent and keep the profits due to the price reduction, while keeping the pricing policy transparent and keeping the extra profits.

My strong view is that the duty-free policy should remain intact, but we must put pressure on the hotel industry and the government to ensure the benefits of the zero customs duty are passed on to the customers. The hotels would profit from the manifold sales increase anyway and tourists will genuinely be the beneficiaries of what the government intended but failed miserably.

Today I am keenly watching the steps being planned from the new General Manager of this Hotel. Tomorrow, delWine would be keeping it on the radar. I hope it will soon become a national phenomenon for the chain and many other journalists, encouraging others to emulate the same pricing formula  and make it a win-win situation for all the stakeholders in wine.

The earlier article in delWine covers the intricacies in details. It is as valid today as it was-five years ago!

Subhash Arora




Subhash Arora Says:

Thanks Captain. I like your analogy. It gives the message very lucidly. Subhash

Posted @ August 07, 2013 15:40


Capt Sanjay Gahlot Says:

I am totally with you Subhash.India is a signatory to WTO and therefore cannot take measures like imposition of extra ordinary high duty on wines or withdraw incentives to hotel iindustry which is basically done to promote tourism.i understand the issues raised by Indian wine industry about protection from foreign competition but protection by way of restrictions wil further weken indian wine industry which is capable of building on its strengths.There is a diffeence between DNA of a child and dwarf which may be resembling due to their size...the child has potential to grow into healthy adult unlike dwarf.Let us not be dwarfs...let us grow and let there be healthy competition.

Posted @ August 07, 2013 15:25


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