Bootlegging, smuggling and corruption are rife in the Indian drinks industry but more crippling for foreign exporters is the country's tax regime. At present, imported spirits are taxed at 222% and wines at 104% but the recent WTO ruling means these could finally begin to fall. Chris Brook-Carter reports

India - no one ever said it was going to be easy for outsiders. A developing, fragmented market, rife with bootlegging, smuggling and corruption, populated by uneducated drinkers for whom price is often the be all and end all.

However, the punitive taxes imposed on the multinationals (MNCs) by the latest Indian budget have taken even the more cynical industry followers by surprise.

In defiance of WTO demands, and in a move that has been seen as pandering to local business pressure, the central government did nothing to lower taxes on imported spirits, which remain at their 222% level, while wine stays at its 104% levy.

There is still a chance that these levies will come down some time this year as the Indian government introduces reductions to bring its import regime in line with WTO stipulations by 2004. However, the government also announced that it intends to introduce a Countervailing Excise Duty (CVD) on imported spirits and, as yet, has made no announcement in regard to the level of this measure.

It was, after what one industry insider called a "fight to the finish", a resounding victory for the local industry lobbyists and a blow to all the multinationals that import, or have made plans to import, into this fragmented and complex market.

By all accounts the battle between the MNCs and the local industry has been intense in the run up to the budget and a war of words through the local press has continued since.

"The purpose of the CVD, which we understand will involve an excise tax based on the average rate currently applying throughout the Indian States, is to 'provide a level playing field,'" says Karen Prentice of the Scotch Whisky Association (SWA).

She continues: "The international spirits industry accepts that excise tax should be applied equally to both imported and domestic products. But imported spirits, which are already uncompetitive with domestic spirits due to the prohibitive tariff, will be further disadvantaged since they are already subject to excise tax, fees and other levies in certain Indian States. This is hardly a 'level playing field' between imported and domestic spirits."

Since the budget, the MNCs have continued to fight hard and most recently claimed that there is no ground for a countervailing duty on imported liquor as there is no central excise on local alcohol - in India the excise on liquor is levied by the States.

"The international spirits industry accepts that excise tax should be applied equally to both imported and domestic products"

But the local industry now seems to have the ear of the Indian government. Plus the All India Distillers' Association (AIDA) has, according to local sources, written to the revenue secretary in the Finance Ministry and the commerce secretary in the Ministry of Commerce and Industry, saying that there is a provision in the Customs Tariff Act 1975 for an additional duty equal to excise duty on any article which is imported into India.

"The domestics have successfully convinced the powers that be that they need another one year to be globally competitive," one industry insider told They also seem to have persuaded the local press, which has been awash with horror stories, rightly or wrongly, of all the cheap Scotch that could flood into the country if Quantitive Restrictions (QRs) and taxes were to be dropped at the same time.

The local paper Business Standard claimed back in February to have got hold of a price list for Allied Domecq, which showed that the FOB price of a case of a dozen bottles of Braemar in the UK is a low as £14.50. "Keeping in mind the current import duty of 200% and the existing exchange rate of Rs68 to the pound, the retail price of a 750ml bottle of Braemar could cost just Rs246.50 (£3.62)," the report said.

Indian Made Foreign Liquor can cost anywhere between Rs100 (£1.68) and Rs475 (£7). At these prices, domestic companies fear that the multinationals, with greater marketing spend, experience and better packaging, will drive the local industry to ruin. And it is not just in the value category. While a bottle of the Indian-made premium, Director's Special, might sell for the equivalent of £7, the Business Standard reported that a bottle of Teachers could be available at £8.75.

In another letter, this time to commerce and industry minister Murasoli Maran, AIDA said: "Multinational companies particularly the Scotch whisky manufacturers are dead set to capture the Indian liquor market by making cheap alcoholic liquors available at a price which would be lower than even their cost of production."

Unsurprisingly, the multinationals are claiming that the current excise duty is more than ample to protect the local industry. At 222%, India already has one of the highest import tariffs in the world for spirits, compared to China (54%), Brazil (20%) and South Africa (5%), for example.

"Imported spirits currently account for less than 1% of India's 65m case spirits market," says Prentice. "88% of Indian Made Foreign Liquor whisky retails below Rs200 (£2.94). To have an impact on the market structure, imported whiskies would also have to cost less than Rs200. With, say, a 150% tariff level this would be virtually impossible. No foreign company however desirous of capturing the market in India would be able to sell at that price."

She continues: "Scotch whisky has a minimum maturation period of three years. Together with freight and insurance costs, plus import tariff, Scotch will continue to retail at significantly higher prices than Indian whisky, which requires no maturation. Even with a tariff reduction to 150%, we calculate that the cheapest Scotch would still cost around Rs770 (£11.32)."

"They have only bought themselves time, there is no way the WTO rules can be avoided."

Whatever price the multinationals would be able to import at, it is probably not unreasonable for the local industry to have been worried. One insider told that the over-legislated alcohol industry had only begun to modernise three to four years ago. The argument is that to suddenly unshackle it completely would be opening it up to multinationals it did not have the experience or resources to compete with.

In reality, while the imposition of CVD has allayed the threat of invading liquor imports and has halted the progress of the MNCs in the short term, the local industry has only won the battle not the war. "This is one year's breathing time," said the insider. "They [the local industry] have only bought themselves time, there is no way the WTO rules can be avoided, India can only drag its feet."

Indeed, the latest information out of India is that an SWA official is meeting with the Commerce Ministry in a "last ditch attempt" to alter the budget on the 26th and 27th of March. It may be that even this battle is far from over.