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Devil’s Share on the increase for Wine in India

Posted: Wednesday, 02 September 2015 16:11

 

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Blog: Devil’s Share on the increase for Wine in India

Sep 02: While one knows that the customs duties in India are high, the excise duties are often arbitrary but fixed by the state governments, there is an important aspect of costing which is latent, unofficial, variable and has been generally going up for wines. This portion that I have defined as Devil’s Share has been impacting the prices negatively, constantly nibbling away at whatever contribution to overheads are generated from the sales. Subhash Arora reports

A few years ago I was a speaker at a seminar in Chile where a fellow journalist from Vietnam shared the stage with me where we made a presentation on the wine industry in our countries. As he explained the import costing, he showed $5000 as latent cost for every container- not contingencies. We were baffled but he explained that the customs people in his country unofficially charged this amount to clear any shipment irrespective of its size. You could be following the law and have complete paperwork but the shipment won’t be cleared without this money. So the importers were obliged to factor it in the costs. If they could manage they would think of ways and means to recover that money by manipulating or fudging the paperwork.

Devil’s Share

Always keen to coin new terminology for the wine industry, I introduced the term Devil’s Share then. Of course I got my inspiration from the already existing term Angel’s Share in Sherry, Port and Whisky and in wine to some extent. This loss due to evaporation of alcohol resting in the porous oak casks is usually at 4-12%.

The loss due to corruption, speed money or whatever one might call it, cannot be accounted for in the book of accounts, but is incurred nevertheless. A frustrated overseas wine producer unfamiliar with the business culture and exporting to India once told me that there were over 20 governmental agencies through which the wine bottle had to pass, involving governmental agency’s hands and each point meant shelling out some money- naturally, smaller the consignment, higher the percentage of this cost.

Let me define the Devil’s Share: It is that cost in percentage of the total cost of selling wine that is an outgo or expense but for which no receipts are available. It would include all such ‘bribes’ or ‘charhawas’ or ‘monthly’ that has to be paid out in order to do business or moving any paper or file. This varies from 5-20% in the wine import business, according to the importers who refuse to divulge individual details for fear of retribution but are willing to give the total approximate cost of the Devil’s Share which is added to the spiralling costs.

It must be clarified that expenses incurred directly due to the government agencies for whatever reason are not included in this definition. Thus VAT which alone may constitute more than the cost of wine at the source, customs duties, excise duty, interest on late withdrawals from the duty free bond are not included in my definition, howsoever devilish the imports take them to be.

For instance, the cost added recently by the introduction of FSSAI which requires sampling charges of around Rs. 3400 per sample, cost of one bottle sample mandatory out of every consignment may be devilish from the viewpoint of the vendors but it cannot be termed as the Devil’s share and is the legitimate cost. However, some importers claim that the second bottles given as a contingency and on a returnable basis are many times not returned. Now, that would be a part of the Devil’s Share. With FSSAI being the latest factor entering the government regulations, there has been an increase in the Devil’s share as reported by many importers.

The Devil’s Share for each wine in the portfolio would be different in terms of percentage, depending on the size of the shipment as some of the costs are fixed on a consignment basis- be it 6 bottles or 600 cases. Then there are some importers, especially the MNCs which do not easily part with their share of Devil’s Share due to their corporate culture. Thus, when Pernod Ricard had their shipments blocked for months by FSSAI last year, they sought legal remedies rather than simply parting with the money towards the Devil’s Share.

The amount is not limited to bribing the government employees. For instance, the last one heard of, Delhi excise allows only a ridiculously low amount of Rs.50 a bottle to be given to retailers for retail showrooms. This is physically not possible. So the retailers are reportedly paid under the table per bottle without which they won’t agree to sell. This may be in the grey area bordering the marketing cost and Devil’s share. Many places there are reports of mafia-type combines charging some kind of a protection money-this would be a part of the Devil’s Share, according to my definition.

The interesting but sad part is that, not only is the Devil’s Share at times more than the profit made by the importer but in any case, he has no choice but to add to his costing. Hotels which normally charge 400-500% of the buying price multiply this cost as well. Thus, if the Devil’s share is 15% and the hotel charges a mark up of 500%, there would be an increase in the selling price of 75% of the cost to the restaurant consumer of the hotel, thus further impeding the wine sales.

So next time you open a bottle, or order a glass of wine, try to guess the Devil’s share. But rest assured no importer will announce a prize for guessing it right.

Subhash Arora

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Tags: Devil’s Share, Pernod Ricard, FSSAI

 

 
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