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Blog: Indian Market Choked not by Taxes Alone

Posted: Monday, 27 June 2011 14:47

Blog: Indian Market Choked not by Taxes Alone

June 27: During my discussions with importers and infinite number of producers oversees, the universal lament is that the high taxes are causing the wine industry to choke in India, thus stunting the growth of wine culture. However, this is only part of the story and there are many other factors some of which I have l detailed as under.

Wine import attracts a customs duty of 150%. Add to it the 4% refundable surcharge (not easy to get a refund) and a few sundry add on taxes for all imports, it works out to around 160%. Add to that the excise duty which many foreign producers don’t know or understand. This may turn out to be zero like in Haryana or up to 300% of the CIF (without adding customs duty) in states like Delhi or Tamilnadu. There is an additional VAT of 20-25% of the final cost in most of the states.

But let us not forget that most, if not all, 5-star hotels and restaurants generating income in foreign currency through credit cards, don’t have to pay ANY customs duty, subject to certain conditions which are not difficult to meet. Over 60% of the wine business is still in this sector. Of course excise duty is still payable as mentioned above. But barring a few restaurants run by wine appassionatos and a handful of 5-star hotels, the profit mark ups are to the tune of 300, 400 or sometimes even 600%. The government issued a circular a couple of years ago directing such duty free holders to restrict the margin to 250%. But this is not followed strictly in reality. Most hotels would challenge my assertions. But give me a hotel which says it is following the directives and let me audit the accounts and I will prove that the management is hiding behind a smoke screen.

Not that the hotels are entirely to blame. The annual license fees  required to sell wine and other alcohols are stupidly and stupendously high for hotels -any excuse and the government is ever willing to demand its pound of flesh.  But the complaint of restaurants overcharging is more a rule than exception- even overseas. At many marketing seminars I attend overseas, the producers always complaint about this policy and rue that they could sell more wine only if the restaurants reduced their margins which normally vary from 100-300%- although 50% is not uncommon for higher end wines.

The margins charged by the importers also vary from 40-120% of the CIF value, which seems extremely high by international standards. They justify the loading because of the unseen and unaccounted for expenses like greasing the palms at every level of the supply chain- and I mean EVERY level. The government is always tightening the screws around procedures to reduce the leakage and each such step means extra bribes. Everyone knows the importance of time in the whole chain of logistics and the government staff does not mind obliging if an understanding is reached.

Management of logistics is a real problem too. Recently, I had organized a Chilean wine evening with the Embassy of Chile. Three importers contacted were out of stock- they import normally once a year so that the container reaches avoiding the hot summers here. When the stock is finished, that is the end of it for the rest of the year for them due to the transit time.

Uncertainty in future working with a producer also restricts them in keeping extra stocks. Many importers say that the producer is not happy with their import volumes and are always talking to an alternate importer who may promise bigger business to lure him. There have been cases where the importer did a fantastic job of promoting the product which made the producer jack up the price by 20% or more, frustrating the importer.

In the same way, consequences of a change of importer midstream, also creates uncertainty for the importer. Although a reasonable time is given for the importer to liquidate the stocks in case of such change, more often than not, the importer is either stuck with inventories (including slow moving stock or  for which the demand was not there in the first place). He balks in making any payment towards the stock which is still lying with him. The producer naturally is not interested to take the stocks back because of dubious quality due to poor storage and the costs of return, besides the procedural complications.

One is aware of a few cases where the legal cases have been filed by the foreign producers for nonpayment while the importer is willing to return the stocks. To compound the miseries, the importer would not renew the annual license for the year after the agreement is cancelled  and thus cannot liquidate the stocks  unless he de-bonds them by paying duty or somehow brings them back into circulation through the  bootlegger s who keep on flogging the dead horse for years, turning several potential wine drinkers off with the bad, spoilt and oxidized wine.  

Like in most countries, wine is kept in the approved custom bonds where interest starts accruing after 90 days at 15% p.a. which is already very high for the importer. But they have been getting by so far by debiting the import license for the duty-free license holders and charging the customers in the retail segment. While Mumbai accepts this correct methodology-l when the customs duty is not leviable, where is the question of interest, demands logic) Delhi customs refuse to accede to the plea and the logic-though both Mumbai and Delhi are part of the same central department of customs. importers are too scared and feeble to protest lest the individuals are annoyed or the Mumbai department might also turn illogical. In the absence of any unity and aversion of all importers to unite and contribute towards the legal charges (they would rather grease the palms as a short cut). To make their life more miserable, the budget in February had proposed this interest rate to be increased to 18% though the government does not pay this usurious interest for refunds or any delays due to errors on its part.

Problem of Poor Storage

Importers and the restaurateurs have by and large realized the cost of poor storage although distributors, wholesalers and retailers continue to keep their eyes closed- primarily because of high costs of keeping the warehouses temperature cooled. Although running an air-conditioner may not be the perfect way of storage, most of them even don’t have this basic facility after being years in the business. They do try to hoodwink the customers by installing air-conditioners but most of them shut them off at night without comprehending that such frequent change of temperature would  increase the chance of corks popping  out and certainly make it worse for oxidation of wine the bottle.  I have visited many stores (DSIDC in Delhi excepted) in Delhi and Gurgaon where the air conditioner ‘just went out of order’ or the bottles showed no sign of being kept cooled, first thing in the morning. Several importers don’t even store their wines in air-conditioned warehouses-basement with exhaust fans is ‘quite effective’ for them.

Recently, we had bought 12 bottles of a fine quality white wine from a Chilean producer of impeccable repute. Almost all of them were dead and oxidized-the reason given by the importer was that the distributor had not stored them properly.

It is perhaps human for businessmen to adopt short cuts to save money but that is an important factor that will continue to choke the increasing consumption.  I have noticed the problem distinctly in case of an Indian wine producer whose wines when air-lifted are very fresh but when bought from the local shops are not always consistent in delivering the best in the glass.

Case of dubious importers

As it happens in all the developing markets, there are a few fly-by-night operators who are ever willing to get rich in one night. I know the case of an ‘importer’ who did not even know the difference between a Chianti or a Barolo or even between Cabernet Sauvignon or a Sauvignon Blanc but convinced an Italian exporter to come to India with a promise of 80 container-loads in a year. To the uninitiated , this would tantamount to about 80,000 cases which would make even the leading importer of today-salivate (and this happened about 5 years ago!) There are several other examples which I will bring out in future but suffice it to say that  it has no bearing on the high taxes.

Lower Taxes courtesy EU

Recent reports in a section of the media suggest that EU may soon  sign a Free Trade Agreement  with India that will allow special treatment to the wine and spirit imported from the EU. While one clearly hopes for this to happen, there has not been a single treaty during the last 10 years where a special reduced duty was levied on wine exports to India- I know Chile and new Zealand are a couple of the few countries banking on this. Clearly, this is a step in the right direction if one were to be optimistic; these other factors will still continue to haunt India as a wine country with a lot of unrealized potential.

The government attitude towards wine must also change and this is taking longer time than usual. The procedures are too complex and at timed nebulous- they need to be simplified. Currently, the impression a common man has is that they are being made complicated intentionally to keep the doors open wider for corruption which has come to be the mainstay at several levels.

Unless wine education permeates at all levels, including the government, the industry will continue to choke and our harping on high taxes alone will continue to camouflage several other issues that currently bog the industry.

Subhash Arora



Bruce Cakebread Says:

Thank you for your excellent article explaining the current situation of the Indian wine market. A good reserach project would be to clarify and agree as an industry what would be the ideal scenario for selling wine in India from the different stakeholders perspectives, ie governement, importers, consumers, on and off premise accounts, suppliers(Indian and foreign producers) and distribution to see if a consenus could be reached and be able to move forward in a focused way.

Posted @ June 30, 2011 12:42


Raghu SAWKAR Says:


Indian and state government have no clue of wine industry and how high the taxes on imported wines. There is good market if taxes come down and cold storage and delivery of wines to restaurants and retail shops improve. All imported wines are cheating by declaring cost wine sold is cheap by 100 to 200 percent to save the taxes. Then they mark up high to retailers to get money back. All state and federal officers involved are highly dishonest and take bribes.Most of the people involved with wine business have no knowledge about wines as they do not drink wines.

Posted @ June 28, 2011 12:04


BrixElite Says:

Completely true. Wine education is not only important for the consumer level but also the government.

Posted @ June 27, 2011 15:57


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