APPENDIX 28
Memorandum by The Scotch Whisky Association
1. INTRODUCTION
1.1 The Scotch Whisky Association (SWA) is the
trade body which represents the interests of the industry at home
and abroad. Its main objective is to promote and protect the Scotch
Whisky industry.
1.2 Scotch Whisky is important to the economy
of Scotland and the UK as a whole. With exports annually contributing
in excess of £2 billion to the balance of trade, Scotch Whisky
is one of the UK's top five manufactured exports and represents
25% of all UK food and drink exports. The industry supports over
65,000 jobs and some £1 billion expenditure each year with
UK suppliers of goods and services.
1.3 Continuing success in international
markets is vital to the health of the Scotch Whisky industry.
The SWA is a proactive campaigner against trade barriers and seeks
to ensure fair and non-discriminatory market access in relation
to competing alcoholic drinks.
1.4 India is a market of considerable potential
for Scotch Whisky producers. However, Scotch Whisky is unable
to take advantage of the opportunities offered because access
is unfairly restricted by a discriminatory fiscal regime for imported
spirits, which is contrary to WTO rules. Today the overall duty
burden faced by Scotch Whisky in India is an exorbitant 212.5%
to 525%.
1.5 The SWA welcomes the Committee's inquiry,
and the opportunity to provide evidence on the Scotch Whisky industry's
experience of the Indian market.
2. THE INDIAN
SPIRITS MARKET
2.1 The Indian spirits market is conservatively
estimated to be around one hundred million cases in volume, making
it one of the largest in the world. The market is dominated by
domestically produced "Indian Made Foreign Liquor" (IMFL),
made almost entirely from molasses and then flavoured to be sold
as "whisky", "rum", "gin" etc.
2.2 Imported spirit drinks are estimated
to only account for circa 550,000 cases, with Scotch Whisky
representing 500,000 cases (only 0.5% of the total spirits market).
2.3 In 2004, Scotch Whisky exports to India
were valued at £13.7 million. This is a small level of exports
given the size of the spirits market and potential Indian consumer
interest in Scotch Whisky.
2.4 India is not a single market for alcoholic
beverages. Fiscal and regulatory responsibility is delegated to
the 28 individual State governments and seven Union Territories.
Imported spirits are subject to radically different and complex
tax and regulatory treatment depending on the State or Union Territory
concerned.
3. MARKET ACCESS
FOR SCOTCH
WHISKY
3.1 Scotch Whisky access to the Indian spirits
market has been unfairly restricted for many years. In contrast,
all Indian spirits can be imported into the EU tariff free.
3.2 Prior to 2001, India maintained a restrictive
import licensing regime for bottled imported spirits, including
Scotch Whisky. In 1999, following an EU/USA challenge in the WTO,
India agreed to remove all quantitative restrictions on imported
spirits with effect from 1 April 2001.
3.3 Fair access to the market in India,
however, was not achieved. The elimination of quantitative restrictions
was accompanied by the introduction of an "Additional Customs
Duty" ranging from 75% to 150%. This new duty was applied
in addition to a "Basic Customs Duty" of 210% and a
"Special Additional Duty" (subsequently abolished in
2004). The cumulative Federal duty burden on Scotch Whisky was
at this time a prohibitive 460% to 710%.
3.4 Since 2001, there has only been limited
movement towards reducing the overall duty burden and today the
cumulative duty rate ranges from 212.5% to 525% for bottled in
Scotland Scotch Whisky.
3.5 Market access therefore continues to
be restricted and Scotch Whisky (and other UK spirit drinks) are
unfairly prevented from competing on a level playing field with
domestic spirits.
3.6 Unsurprisingly, the excessive duty burden
has encouraged a thriving grey/black market trade in Scotch Whisky.
It is estimated that less than 15% of Scotch Whisky consumed in
India is sourced duty paid through official retail outlets.
3.7 The grey/black market has also resulted
in locally produced counterfeit being sold as Scotch Whisky brands.
(It is estimated that up to half of Scotch Whisky sales in India
are counterfeit.) This is damaging to Scotch Whisky's reputation,
and the industry has to devote considerable resources to protect
the category from "passing off" and to protect individual
brand intellectual property rights.
4. BASIC CUSTOMS
DUTY
4.1 India is entitled under WTO rules to
levy an import tariff. However, the "Basic Customs Duty"
on Scotch Whisky, levied at 150%, is very high by international
standards.
4.2 In contrast, other developing countries
such as Brazil (20%), China (10%), and South Africa (3%) apply
more reasonable tariffs to imported spirits. The high Basic Customs
Duty applied by India works to restrict market access for Scotch
Whisky and is also a major contributory factor to the grey/black
market trade.
4.3 China offers an interesting comparison.
Since China joined the WTO in 2001 and began a gradual process
of reducing its import tariff on spirits (from 65% to 10%) and
liberalisation of distribution arrangements, Scotch Whisky exports
have risen from around £1 million a year to over £30
million.
5. ADDITIONAL
CUSTOMS DUTY
AND OTHER
RESTRICTIONS
5.1 Additional tariffs and taxes, applied
on top of the Basic Customs Duty, complicate the tariff and tax
system for imported spirits in India.
5.2 In India, an "Additional Customs
Duty" of 25% to 150% (depending on cif value) is applied
to imported spirits. This is applied at Federal level and, in
principle, should be levied on imported spirits in place of State-level
excise duty.
5.3 In practice, however, the Additional
Customs Duty rate applied by the Indian Government to imported
spirits is much higher than the excise duty levied on domestic
spirits in most Indian States. This is a breach of India's obligations
under GATT Article III.2. The WTO requires countries not to use
tax policy to protect domestic production by discriminating against
imported products.
5.4 In some States, despite the Additional
Customs Duty supposedly applying in place of State-level excise
duty, imported spirits are required to pay both the Additional
Customs Duty and State excise duty. This has created a situation
of double taxation.
5.5 The Additional Customs Duty is therefore
applied in a discriminatory manner, contrary to WTO rules. It
also inflates the overall tariff burden faced by imported spirits
to between 212.5% and 525%.
5.6 In contravention of WTO rules, at least
thirteen States also apply further discriminatory taxes of one
kind or another on imported spirits, including the application
of licence fees, special duties and import fees, which are not
imposed on domestic products.
5.7 Seven Indian States have failed to introduce
policies to allow the retail sale of imported spirits (this should
have taken place after the removal of quantitative restrictions
in April 2001).
6. EU TRADE BARRIER
REGULATION COMPLAINT
6.1 The SWA strongly supported a July 2005
complaint by the EU wine and spirits industries regarding the
Indian import regime, made under the EU Trade Barrier Regulation
(TBR) procedure (Regulation No 3286/94).
6.2 The European Commission supported this
complaint and launched an investigation into the Indian import
regime for EU wines and spirits in September 2005. This investigation
is examining violations of WTO rules, most notably in the application
of the Additional Customs Duty and internal State taxes.
6.3 The formal dialogue under the TBR mechanism
can be used to seek early agreement between the EU and India on
measures which will help to resolve the market access problems
identified in the Commission's investigation. The Commission is
expected to report in the first quarter of 2006.
7. SCOTCH WHISKY
INDUSTRY PROPOSALS
7.1 Scotch Whisky producers have worked
closely with UK Government departments, the British High Commission
in New Delhi, and the European Commission to improve market access
to India. Strong UK Government support has been consistent and
invaluable. The industry has also been in regular dialogue with
the Indian Government and domestic spirits producers.
7.2 Industry proposals have been developed
to eliminate the damaging grey/black market trade in Scotch Whisky
by reducing the tariff and tax burden to a more reasonable level
by international standards. This would result in more affordable
retail prices, thereby encouraging consumers to switch purchasing
to legitimate channels.
7.3 A recent study by RaboBank for the Indian
Government concluded that a reduction in the Basic Customs Duty
to 75% could bring 97% of the grey/black market in premium Scotch
Whisky back into official channels. A switch to legitimate purchasing
channels would boost Indian Government revenue.
7.4 Indirectly, the measure would also reduce
the risk of counterfeit and help to protect the Scotch Whisky
category from unfair competition. The SWA is therefore proposing
such a step should be taken in the Indian Federal Budget in February
2006.
7.5 This would begin to meet the industry's
aspirations for genuine access to India, and encourage Scotch
Whisky producers to develop their businesses in an increasingly
important world market. The industry would, for example, be able
to invest with more confidence in distribution to the Indian market.
7.6 The SWA is also proposing that the Indian
Government should take the opportunity of the forthcoming Federal
Budget to eliminate the Additional Customs Duty and to introduce
a level internal taxation playing field for imported and domestic
spirits.
7.7 The latter proposal could be achieved
by the introduction of a Federal or State levy on imported spirits
which is identical to the excise duty applied to domestic spirits
in the State of consumption. Such a move would allow India to
make progress towards meeting its WTO commitments.
8. CONCLUSION
8.1 India is potentially one of the Scotch
Whisky industry's most important developing markets over the next
10 to 20 years. Improved market access to India is the industry's
top international trade priority.
8.2 Scotch Whisky (and other UK spirit drinks)
are currently unable to take advantage of the opportunities offered
because of the high tariff and the continuing application of a
discriminatory fiscal regime for imported spirits.
8.3 The industry is seeking fair market
access in line with international trade rules. Industry proposals
would help limit the grey/black market incentive and bring sales
back into mainstream trade. India should take early steps to meet
its WTO commitments and provide a stable environment in which
UK distillers can invest.
8.4 We would of course welcome the opportunity
to provide further written or oral evidence to the Committee or
discuss any points raised in this submission on which the Committee
may wish to seek further details.
January 2006
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