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Blog: Taxes may Drip Down but not Drop

Posted: Thursday, 07 June 2012 16:47

Blog: Taxes may Drip Down but not Drop

June 07: Whenever I meet journalists and producers, their favourite question is when the taxes are coming down. However, I was a bit rattled when told in the recent past- at a UGCB tasting and VieVinum - that the taxes are about to come down in India. With a sudden spurt of reports in the print media, there is need to warn the fine wine producers to take a cautious approach to the news, some of which could be planted.

Nobody denies that the talks between EU and India for the FTA have been progressing, albeit slowly during the last 4 years and the Indian side is quite inclined to reduce the customs duties on wine and spirits, if not eliminate them. The excise monster and the big VAT on wine will play the party pooper and  the tough, archaic and complicated procedures bordering on illogical will remain a barrier for some time.

The current customs duty is 150% on assessed value-most hotels are exempted since they meet the criteria. There has been an additional special duty of 4% on the cumulative value, making a total of 160%. However, during the current year, this duty is being waived off subject to a plethora of documents.

No one in their right mind would dare to predict at this time, the final outcome of the FTA which the Indian government knows is in the country’s interests. But democracies are known to be imperfect especially where there are people of different beliefs and the political constituents of different mindsets. In the existing coalition government, the government doesn’t always manage to do what it thinks is best. It has been already accused of being passive and inactive on many counts. But our bureaucrats, who are some of the most intelligent people in the business, understand that the reduction in slabs where the cheaper wines are not ‘touched’ so that the domestic industry does not suffer, is in order.

General speculation is that Fine wines (one can only assume they would consider the wines costing above $30-50 C&F would fall in this category) would face a lower import duty of 40%,though I believe it should be 20% to offset the additional 20% VAT which will never be waived. When the whole country roared with anger last month because of the recent increase of Rs.6.50 (10%) a liter in petrol prices, a few states reduced the VAT marginally to appease the local populace-wine is never going to be treated as importantly as petrol!

The mid - price wines might have an import duty of 80-100%; one can only speculate that they would consider wines between $5-30 in this range– however, this is only conjuncture for the moment. Lower priced wines may not get the benefit as the producers are sitting with the proverbial gun in their hands and they do have a strong lobby and a reasonable demand to be allowed to survive and resist any reduction. No wine producing country will accept to be extinct and allow the foreign wines to prosper- even I would oppose it even though I love my Barolos, Bordeaux and wines from most countries.

But the big spoke in the wheel is the excise duty which most reports in the media seem to ignore- they simplify by comparing with Hong Kong, overlooking the fact that even Singapore had the option even though it has a relatively free economy but continues to charge fairly heavy duties- even higher than India for low end wines as they are fixed per bottle. India will never be like Hong Kong.

It is nice to dream of fine wines. I also dream at times of a beautiful cellar with such wines, only to be shaken awake when I remember that only 44 liters of wine can be stored in the residence.  The procedural wrangles are infinite- for the importer, wholesaler, retailer and the consumer. Advertising of course is banned (liquor industry circumvents it smartly but openly)  but the strict excise laws, most of which have arresting powers  as an option, keeps everyone on tenterhooks – not a comforting feeling for the industry or the consumer.

Unfortunately, not only does the central government have no say in the State matters, being of Federal nature, the government looks the other way when the States go overboard. When the customs duty was reduced under the indirect directive from WTO in 2007, the government implicitly told the states to increase the excise duties at will. Ironically Delhi, one of the few States being ruled by the Congress party, as the main constituent of the UPA coalition, increased the excise duties many-fold and today has one of the highest excise duties in the country. If the central government has not shown any inclination to bring it under check, how can EU expect that these duties would also become zero?

Today it is legal to invest in fine wines abroad-be it London, Paris or Hong Kong which is much closer to be present physically for those who are inclined to invest in the fine wine market or wine funds which can operate out of India as well. As the exposure to fine wine increases, there will be new markets for these areas.

So what should the producers do? Go to China where most expect the bubble to burst at any time and at any rate the prices are not likely to explode any further? The answer is in the fundamentals that countries like the US, UK and Australia or even Japan have gone through. While we must continue to put pressure on the government and lobby, plead or do whatever it takes to make them understand the importance of lower taxes and the brighter future for Indian wines as they learn to compete with the foreign wines which will become more reasonable with lower taxes, we have to get more people to drink wine as a lifestyle and healthy product. We have presently 2-3 million people drinking wine (there are no surveys done but guesstimates only). The number needs to go to 20-30 million which is quite achievable in the next couple of decades.

There is still enough wealth in India to make these potential new wine drinkers imbibe the whole spectrum of wines, low-end to Fine wines. Not every foreign producer will be able to get a share of the market but the market is there. The road is rough and winding and long and not for the faint-hearted and weak-kneed. If you enjoy the journey to the Everest even though you know you may never reach the Summit,  join the Club.

There are a plethora of articles I have been writing on the subject. The following are some of them- I think the message has been consistent. In the long term, India will be a great market but as the well-known economist Keynes used to say-in the long term we will all be dead!

Subhash Arora

Duty Reduction on EU Wines Distant Dream

EU- FTA: Wine Tax Reduction Remains Pipe Dream

Blog: Jeannie's Got a Gun

Blog: Indian Market Choked not by Taxes Alone



Subhash Arora Says:

They lobbied with the government successfully and influenced and convinced them that they were promoting tourism and it was important for the foreign tourists to get wine and spirits at reasonable price and since they were earning 'precious' foreign exchange they should be given the privilege.

Posted @ June 09, 2012 12:37


Vijay Kumar Malik Says:

Hi, why do hotels have the preference over other importers vis-a-vis Custom Duty?

Posted @ June 09, 2012 12:25


Subhash Arora Says:

Sorry Bhagu, wine used to attract around 600% import duties in the 90s, then came down to around 420% in 2001 and now the import duty is 150%-but excise and VAT are extra. In Mumbai where you live-when not in LA, Indian wines do not have any excise duty anymore and even the VAT of 20% is refunded to the producers (actually 16%). It is another matter that on one pretext or the other, they are pocketing it and not passing a paisa on to the consumer. There is a talk (more like a wishful thinking) going on of this 150% going down to 0. Also, for your info, the hotels were paying this 600% duty 20 years ago, but the import duty has been already nil for the last 5-6 years so they wont be affected, unless states increase the excise duty.

Posted @ June 09, 2012 12:20


Bhagu Karnani Says:

As far as I know taxes have NEVER come down on any alcohol products in India - Bhagu Karnani

Posted @ June 09, 2012 12:14


Subhash Arora Says:

Thanks for your comments, Dan. Very well put. I hope some intelligent government guys read the Blog and others like it. Subhash

Posted @ June 09, 2012 11:37


Dan Traucki Says:

Dear Subhash: You are so right in all you have been saying about taxes & duty. Take China for example,the main beneficiaries of the "wine explosion" in China is the local Chinese wine industry, some of whom have now started to make world class wines which have won gold medals in world wide wine competitions. Sure the "foreign devils" have sold a very large amount of wine in China, which has probably saved many overseas wine companies from going out of business after the western generated GFC,BUT the real beneficiaries are the Chinese wine companies that have lifted their standards from making wine which was the equivalent to "bag in box" quality to wines which can hold their heads up high in world wide company. The foreign brands will come and go depending on a myriad of factors and circumstances such as the value of the RMB, government rules, local perception etc However along the way much the local industry will have lifted their quality sufficiently to compete on the world stage and eventually start exporting their wines to the rest of the world.The roll of countries that have achieved this so far is effectively most of the "New World" wine producing countries. Imagine the day when one could enter a bar or restaurant almost anywhere in the world and order a bottle of Indian wine. Well here in Australia back in the 1960's or 1970's somebody must have imagined the same for Australian wine and today it is a reality!!! Alas sadly I fear that I will not live long enough to be able to order a bottle of Sula, Grove or any other Indian wine at a restaurant here in Adelaide, whcih is so so sad.

Posted @ June 09, 2012 11:28


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