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Commentary: Mixed Signals of Duty Reduction on EU Wines

Posted: Saturday, 15 December 2012 11:16

Commentary: Mixed Signals of Duty Reduction on EU Wines

December 15: While the FTA negotiations between EU and India have been progressing at a slow pace since 2007 with both sides hoping for an early conclusion, a couple of recent articles in the print media proclaiming the duties will come down to 30% in 2017, is a matter of conjecture bordering on misreporting, writes Subhash Arora who has had a couple of exclusive meetings with the Ambassador of EU in India confirming no such agreement has been reached so far.

‘Come 2017, customs duty on "high-end" wine is proposed to be slashed to 30% from near 150% levels now. Although the move may not be palatable to local players, for consumers, this could mean an endless party as anything that costs over $3.75 a bottle is likely to be subjected to lower import duty as part of the Broad-based Trade & Investment Agreement (BTIA), known commonly as FTA, with the 27-nation bloc,’ reads the article in Times of India followed by a couple of similar news reports in the Economic Times which were later re-produced by a few bloggers too.

delWine has since been inundated with enquiries from producers in EU and ‘authentic information’ volunteered by several well-wishers of delWine and readers of TOI/ET since. I have been a regular reader of both newspapers for decades but I ignored these news reports, knowing they were not fact-based. They reminded me of a story about a palm reader who went to a house where the lady was pregnant. ‘You will be certainly blessed by a son,’ he told her, making the family thrilled with joy. Then he went to the neighbouring lady and told her, ‘I have told the expectant mother that she will be blessed by a son. But in fact, she will have a daughter,’ thus making himself a hero in either case.

Facts vs. Fiction

There is no doubt that both sides are keen to conclude the treaty which envisages a reduction of customs duty on products like imported cars, wines and spirits. However, there have been disagreements and almost a stalemate on the quantum of reduction and the cut-off for wine. Indian wine industry has been lobbying hard against tax reduction but has come to terms with graded reduction on high priced wines which have a totally different market and does not affect them.

Understandably, the domestic producers need to be protected against falling duties, making them uncompetitive. Wines costing less than 2 Euros, even though of modest quaffable quality, can be better than a significant number of Indian wines which are already feeling the heat. Reducing them further would threaten their sustainability and the EU seems to have come to terms with that. The reported threshold of $3.70 may not be acceptable to but apparently there has been no agreement on this level anyway. It is quite a bit more than the EU has proposed, and could be a major blow to wine producers from countries Like Spain, one of the 27 constituents, which in turn may reduce the overall interest of the FTA for the EU.

The ongoing treaty negotiations have been considered to be in the final stages during the last couple of years with newspaper reports speculating every time the negotiators sit down. But now even the biggest optimists only hope it is signed within 2013. As already elaborated in delWine, there is an elaborate procedure on both sides of the Suez to ratify the treaty before it can be implemented. Parliaments of each of the 27 countries in EU have to discuss and agree-this can normally take a year.

As a procedure, the FTA is negotiated and proposed by the European Commission to the European Council  of the 27 Member States.The FTA is negotiated on the basis of a mandate given to the Commission by the Council, there should not be much difficulty in getting the final result approved if it does not deviate much from the mandate. If it does, the Commission has to mount a successful defence when it presents the agreement to the Council . If approved by the Council the FTA then goes for approval to the European Parliament – a new procedure under the Lisbon Treaty. The issue here is that the Parliament is likely to want to test its new powers and it will, at the least, carefully debate the matter before deciding whether or not to approve it. The European Parliament has been involved in the mandate so the level of deviation from the mandate will be a significant factor.

Then, there is our own ‘emotional cliff’ to scale. Recent FDI in Retail is an example where the government announcement of allowing the FDI last year after years of dithering and vacillating, resulted in strong dissension and after a year of protests, debates and final approval by both the Houses of parliament last week it looks like it might be implemented in practice. This should give some idea of the possible opposition to an Agreement that might be perceived by some sections as promoting alcohol consumption.

An extensive interview with Mr. Joao Cravinho, the EU Ambassador to India, whose office oversees the progress of the FTA negotiations, agrees that the slow pace of the negotiation is a matter of concern. Reluctant to be drawn into details due to the moral commitment to the Indian government, he is quite emphatic in denying that the Agreement has been signed. At this point all talks and reports of the quantum of reduction and the cut-off point are a matter of conjecture, as there could be last minute changes. While indicating that the reduction could be down to the 30% figure being bandied around, the cut-off level has still not been agreed upon. If one could read his lips, it would appear that $3.75 might not be acceptable to EU but apparently . He did express the hope that by the Spring of 2013, the FTA could be signed, giving both sides a couple of years to get the ratification done.

delWine has maintained that with the general elections in India slated for 2014, it would be highly unlikely for our government to put their signature when we are closer to the elections as it may be reluctant to touch the sensibilities of the anti-alcohol lobby and a big chunk of their vote bank.

Ambassador Cravinho however, also dismisses the reports that both sides have agreed for a partial FTA. ‘Perhaps, India may want that but I am sure, EU has not agreed to any such proposal-nor is it likely to agree in future,’ he asserts. He is also apprehensive that if the treaty is not signed by the next summer, EU may also cool down because the proposed talks with Japan and the US are going to gather momentum soon and they are very important business partners as well.

Excise- the party spoiler  

One important aspect we tend to overlook is the Excise department in various states raising its ugly head whenever the import duties are reduced. When the Indian government announced the customs duty reduction on July 4, 2007 and reported by, the euphoria was short-lived as Maharashtra government immediately announced the excise duty increase of 200%, thus neutralizing most of the foreseeable gains. Delhi, which had a bearable excise duty of Rs.150 a bottle, followed suit.

Under constant pressure and lobbying from the choked importers threatened with closure and a tumbling market, Maharashtra relented and brought the duties to more amenable levels even though it did not roll back completely. However, Delhi government refused to relent and though there have been attempts to streamline the system, there has not been much reduction and today it is one of the highest taxed states in India for wines.

There did not seem to be any rationale except the need or greed for higher revenues. WTO had raised their hands since the customs duties was brought down to the outside agreed limit of 150% (interestingly, the customs duty used to be 100% before the additional duties were waived off; the government waived off the ACD but increased the basic duty as it is today). What prevents the excise departments in various states to nullify this effect?

Although, it may not be easy to discriminate against the wines from the EU only but we have very creative and crafty financial experts in our state capitals, who are capable of coming out with innovative schemes of snatching back with the other hand which the central government may give with one hand.

Even Ambassador Cravinho is nonplussed when queried on this likelihood. ‘This is an internal matter for your government. I cannot comment on it but perhaps GST concept which is close to an agreement might be able to address this issue,’ he says hopefully.

EU is India’s closest trading partner. The two-way trade between the two increased to $110.26 billion in 2011, up 30% from $83.37 billion in 2010. It's almost completely balanced in terms of goods whereas EU enjoys  60-40 advantage in services, which is about 25% of the total trade.  Both sides hope to increase the business through signing of the FTA and as such it is in the interest of both to come to an Agreement.

In 2017, says the report! Though 5 years may be a short time when measured on a human-life scale, it may be really long-in terms of Indian polity. Anything can happen between 2013-2015! We are hopeful that the customs duties will come down on the premium EU wines to 30% by 2017. But we hope the reduction will be passed on to the consumer totally. But let’s not count our chickens before they are hatched.

And to my ill-informed reporters of TOI/ET jumping the gun and all those bloggers who blindly followed and reported the speculation as a news item, I would like to say, hunooz dilli door ast*!

Subhash Arora

* A Farsi (a popular Iranian language) phrase since the Moghul times which translated into Hindi, meant ‘Abhi Dilli Dooor Hai’. In simple English, it translates as ‘there is many a slip between the cup and the lip’- editor

You may be interested to read our earlier related articles:

Duty Reduction on EU Wines Distant Dream

Blog: European Union Beware

Fine Wines from EU may get Cheaper Next Year

All the above articles have been written independent of each other -editor




Siyamalan Says:

Thanks for the insights Subhash That's quite a shock after blindly believing in that TOI report. I am going to be quite happy, even if the cut-off levels were to be $10. But how much truth is there about year 2017 where the duties might be lowered to 30%. While Cravinho is hopeful that FTA could be signed by early next year, what exactly is the reason that the lowering of duties be postponed till 2017!! Given that 5 year is very long duration considering Indian politics, It makes me to think that these things will never pan out Siyamalan (one of the blogger who blindly followed and reported :P)

Posted @ December 19, 2012 12:39


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