Open Forum

New Delhi, 12 December 2008

India, US At WTO

WINE BRAWL MAY END IN ‘HAPPY HOURS’

By Dr. P K Vasudeva

Drinkers could well be in high spirits in the coming months. Tamil Nadu seems to be the first beneficiary of the pressure being put by the World Trade Organisation on India, after the US won the appeal against India on wine dispute. The appellate of the WTO’s Dispute Settlement Body has allowed the sale of imported wines and spirits in India and the first permit has now been issued.

The pressure by both the State Assembly and the Central government has made the Tamil Nadu government take a decision to start issuing permits for leading brands of wine and spirits. The first order has been placed with a Delhi-based leading importer. Supplies are expected to reach the market at an air-speed and the products are to be made available immediately.

So, Scotch drinkers would celebrate the decision by buying a Black Label for Rs.3600 or the Red Label at half the price in the liquor stores, as Scotch would retail for as low as Rs.1200 now. These prices include the imported duties, local duties, 24 per cent margin of the State-owned monopoly distributor TASMAC (Tami Nadu State Marketing Corporation) and 58 per cent local sales tax.

The WTO has three major States against whom it has an issue, apart from the heavy excise duties being charged by Maharashtra and Karnataka etc., making the total duties more than 150 per cent, the outbound limit as agreed by India. Tamil Nadu and Kerala are the two major States who have not been allowing the sale of imported wines and spirits. In fact, Kerala had issued a tender for spirits as early as February this year, but so far no action has been reportedly taken. Perhaps awaiting the outcome of the case in the WTO.

A senior delegation from WTO is expected to arrive in India soon to address the issues and have an agreement. On its part, the Central Government appears to be keen to settle the disputes, notwithstanding Article 147 which gives the States autonomy in alcohol taxation and policy. Interestingly, informed sources say that the Government has perhaps willingly allowed the case to be won by the US, so as to help itself resolve the problem, pending since July last year, wherein additional duties were waived and customs duties brought in to 150 per cent level as agreed with the WTO.

Further, contrary to reports appearing in some mainstream dailies, the Indian Wine Academy is of the firm opinion that the total duties should be brought down to 150 per cent. Thus, New Delhi would have to use all its resources to make it happen -- not only to save itself an embarrassment but also the heavy penalties that can be imposed by WTO under the existing agreement. However, the UPA may want to buy time in view of the ensuing general elections. But the writing on the wall is clear. The States must open up and duties brought down to the levels agreed to. In the end, though the customer would definitely benefit, the States too will not lose on revenues.

It needs to be recalled that the highest appeals court of the WTO, the Appellate Body, recently upheld the Washington’s challenge against India’s imposition of “additional duty” and “extra additional duty” on imported alcoholic beverages. It maintained that these two duties were inconsistent with the WTO’s core scheduled tariff commitment rules. These additions result in imposition of duties in excess of those committed by New Delhi in its schedule of tariff concessions. However, the Appellate Body declined to make any recommendations to the WTO’s dispute settlement body about what India should do in the light of its ruling.

Last year, the Union Government had removed the additional duty on wines and spirits.  In addition, it exempted various products from extra duty, making the case redundant. However, the US went on to challenge these two duties before the Appellate Body after a disputes settlement panel pronounced that Washington had failed to establish that the duties imposed were inconsistent with Articles II:1(a) and II:1(b) of the GATT 1994.

The Appellate Body reversed the panel’s findings and upheld Washington’s complaint. Under Articles II: 1(a) and II 1(b), WTO members cannot impose duties more than ordinary customs duties that are spelt out in its tariff schedules. India too challenged some aspects of the panel’s conclusions, while the EU, Australia, Chile, Japan and Vietnam participated as third parties. Thus, at the core of the dispute lies the question  whether India can impose duties in the form of additional duty or other duties and charges on alcoholic beverages and other items that are in excess of what are called the ‘ordinary Customs duties’, notified to the trade body.

India had maintained that the additional duty was imposed as a means to “counterbalance”  State value-added and sales taxes, the Central sales tax and other local taxes, and that these were justified under Article II:2 (a). Such duties, it argued had been in vogue between 2003 and 2007, and that the Government had removed the additional duty.

In the face of the legal challenge, last year the Government exempted various alcoholic beverages from the extra-additional duty. However, an adamant US continues to maintain that both these two duties, irrespective of their current status, violate the trade body’s scheduled legal commitments. Its arguments found favour with the Appellate Body, which pronounced that the dispute settlement panel was wrong in its interpretation between a border measure (ordinary Customs duty) and an internal tax. There was a need to have a qualitative comparison of all these measures, it asserted, and noted that the disputes settlement panel had failed to carry out such a comparison.

Earlier the EU, as a third party of the US complaint, had asked the WTO to rule on the legality of India's high duties on imports of wine and spirits, arguing that these harmed Europe's wine and Scotch-whisky producers. The Commission's decision to ask the WTO to set up a dispute-settlement panel came after several months of failed negotiations.

The EU had launched formal consultations with India at the WTO in December last, after a Commission investigation revealed that Indian taxes on imports of spirits and wines were "in violation of WTO obligations". The taxes, which are imposed on top of ordinary customs tariffs, mean that European spirit and wine exporters face duties as high as 550 per cent if they wish to access India's rapidly-expanding alcohol market.

Currently, India, the world's largest whisky market, buys 1 per cent of the spirits and 15 per cent of the wines it consumes from foreign suppliers. Its’ trade officials have said that they are aware of EU concerns but that the issue is difficult to resolve since duties on alcohol are the responsibility of State-level governments.

Well, in the context of its wine sector reforms, the EU is attempting to increase exports in order to keep the sector alive, as consumption in the EU dwindles and cheaper non-EU wines become increasingly popular in European households. India, with a wine market growing by 5-9 per cent annually, represents a huge and largely unexplored business potential in the years to come, waiting to be tapped.---INFA

 (Copyright, India News & Feature Alliance)