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Delhi Wine Club
Misdirected efforts of Indian Wine Producers

Posted: Tuesday, 11 September 2012 10:34

Feature: Misdirected efforts of Indian Wine Producers

September 11 : Efforts by the All India Wine Producers Association to help develop Indian industry are commendable but a recent letter to the Ministry of Commerce requesting to discontinue the Duty Free Scheme for star hotels to support Indian growers & wine industry appear to be misdirected, even reeking of misrepresentation of facts. Recommendations, if followed would have disastrous results, writes Subhash Arora who has been an undisputed crusader for promotion of wine culture in India

‘Duty free scheme for wines for star hotels was introduced way back when Indian wine industry was not existing & it was introduced to encourage the tourism in India and will result in failure of the Maharashtra’s Grapes Processing Industry Policy 2001,’ says the letter. The fact is that when the policy was framed in 2001, free wine import was not even allowed except under special licensing. It was opened up in 2002 but with import duties that were around 420%

Even the producers openly admit that the Maharashtra Policy 2001 was so conducive to the farmers that it resulted in over-production of grapes and wine that filled the tanks blindly, even categorized as ‘liquid gold’ without any consideration for quality or the market for these wines; the first step that spelt trouble for the industry. The growers’ memory is short and they forget that the ‘poor farmers’ jacked up the prices of the grapes by 20% or more overnight and thought nothing about breaking long-term contracts with wineries to make a quick extra buck. Moreover, a real negative aspect of this policy was taxing out-of-state domestic wines. This resulted in States like Karnataka reacting and announcing their own policy in 2007-8 which included taxing out-of-state wines.

It was in 2003-4 that the 5-star hotels were allowed the duty free imports, based on their foreign exchange earnings, ostensibly to help promote tourism. These licenses allowed them imports for all foreign alcoholic beverages and even equipment for their business. Initially, the licenses were granted based on past 3-year ‘export’ performance, based on earnings through credit card sales but later the norms were relaxed.

Several stand alone restaurants having similar foreign exchange earnings protested and lobbied with the concerned authorities. They were later also given an ‘on par’ treatment by the government although most of them exhaust their license before the fiscal year is over; unlike the 5-star hotels which have a majority of their foreign exchange earnings through revenues from room rents and have sizable licenses, restaurants earn only due to food and beverage sales.

It is true and unfortunate that these hotels allegedly colluded and took advantage of the government policy to the hilt and rather than passing on the benefits to the ‘tourists’, have been using the duty- free lower costs to increase their profits, some charging 5-6 times their cost price. In fact, there was a representation made to the government about 4-5 years ago and they were indeed threatened with cancellation of the scheme, not necessarily to benefit the local wine industry but to ensure that the benefits were in fact passed on to the customers to promote tourism, the objective of the duty-free scheme. A directive made it mandatory, at least on paper, to limit the mark ups to 250% for wines and 400% for spirits.

This brought down the prices in the hotels significantly –up to 30% in some cases but only temporarily. The hotel owners have developed ingenious ways to circumvent the policy. Compounding the problem has been the issue of increasing excise duties. If the excise duty went up, say by Rs. 300 a bottle, it translated to a jump of Rs.750 in the cost even according to the directive (not counting the 20% VAT on the additional costs as well). Hotels also benefit from the VAT since the VAT on the final product is up to 6 times more than they pay to the government as it is paid on the cost price.

Hotels have their own explanations, some justifiable while others are not. Besides, their higher overheads and capital investments they are constantly under pressure of ever-increasing license fees and fixed expenses even if they do not sell a single bottle of wine. There is generally a constant tug of war between the F & B personnel who concede privately and understand that the sales could be much higher if the prices were reasonable and the finance departments which are used to percentage food costs and a mark- up of over 400-500% on food and soft drinks.

The argument is akin to the excise policies in various states, which believe in increasing the excise duty and other levies every year to generate higher revenues while the importers and consumers believe that the reduction would result in increased demand and hence higher revenue for the government. Those of us who remember the ridiculously high incremental income tax rates before the reforms took place and the government rationalized and reduced Income Tax only to result in higher revenues, would appreciate the logic.

The wine producers need to work at lowering their costs, improve their quality and plan their growth keeping exports in mind as well. They have an edge over the hotels in the retail sector where imported wines are priced much higher. Perhaps they could lobby with the government that the hotels should not sell Indian wines at more than 250% margin (though the government cannot legally enforce the clause as the hotels do not get any duty benefits). Ironically, foreign tourists are more inclined to drink Indian wines as a way of discovery and therefore, the elasticity of demand is lower for Indian wines. Unless, the hotels reduce the price of Indian wines, the volumes cannot be higher. However, producers may lobby with the ministries of tourism and commerce to link the duty-free 250%- cap clause to Indian wines as well. The government will be within its right to insist on this clause since the duty-free license is not a right but a privilege.

Abhay Kewadkar, Business head of Four Seasons, currently the second biggest domestic producer behind Sula agrees. At a luncheon meeting at The China Kitchen at the Hyatt, he conceded, ‘It is neither desirable nor workable to try to stop the imports or ask for withdrawal of the duty-free status for hotels and restaurants. That would simple kill the whole industry.’ Looking at the wine list that lists a Sula Sauvignon Blanc at Rs.1900++ making it Rs.2552 to the customer, he says, ‘how do you expect the wine culture or sales to grow when the VAT alone of Rs. 509 on this wine is more than the cost of wine to the hotel?

‘The main issue Indian wine industry faces today is the high end-consumer price, especially on premise. Imported wines in five star hotels under import license have an advantage. Care should be taken that India does not become a dumping ground for cheap wines. Import duty structure should provide for this protection. While stopping the imports of wines under DF license may not be a tenable solution, the hotel industry should be encouraged to reduce the end consumer price for domestic wines by revising the beverage cost to 50 percent than present 20 percent,’ he says

Withdrawing the duty-free license is neither desirable nor feasible unless the government wants to kill the flower in the bud. Such acts on the part of AIWPA will only cause polarization in the mind of consumers. Let us not throw the baby out with the bathwater and look for practical solutions rather than publicity stunts.

Subhash Arora

AIWPA Letter


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