Government of India finally removed the ACD on wines and spirits yesterday but increased the basic duty from 100% to 150%. Duties on beer and liquor remains unchanged at 100% and 150% respectively.

Following complaints from the EU and US on high duties levied by India and possibly Baron Vijay Mallya of White & Mackay, the Finance Ministry withdrew yesterday all additional customs duties (ACD) on imported wines, beer and liquor through a notification by Central Board of Excise and Customs.

As reasoned and predicted by delWine, the government has increased the basic customs duty on wines from 100 to 150 per cent, the upper limit allowed by WTO. Thus the total duty on wine gets reduced from a max. of 266%. Liquor is a bigger beneficiary as the basic duty was already 150%; and there is no increase. On the other hand the elimination of ACD will bring the duties down from the earlier max. of 550%.

The removal of the duty comes shortly before the meeting of a WTO panel to consider the complaint of European Union and the USA against high Indian duties and taxes on foreign wines and spirits. The government had been saying all along that they would like to settle the issue before the WTO would take a negative decision.

India 's bone of contention still remains. They want EU to allow them the export of Indian whisky to EU. However, EU does not permit that. According to them, European whisky is made from grain while Indian whisky is distilled from molasses. Hence, they cannot be treated as the same. It considers Indian whisky as rum, which is not appreciated by the local producers. The government is trying to hammer out a compromise formula on this issue.

The government had removed the import restrictions on wine and liquor completely in 2001, but subjected these products to additional customs duties, also known as Counter Vailing Duties at specified rates, presumably to provide level playing field to the domestic manufacturers, This additional duty was over and above the 150 per cent basic customs duty on spirit and liquors and 100 per cent on wine and beer.

Before April 1, 2001, the import of beer and alcoholic liquor was exempt from ACD in lieu of state excise duty while import of wines attracted additional duty of Customs at Rs 9 per litre.

As expected, the increase in duties proved a boon to the Indian wine producers who derived a tremendous price advantage. With their prices being 2-4 times higher than the imported equivalents in the producing country, they were still able to take the major chunk of benefits due to the growth in wine consumption.

Domestic producers achieved a compounded growth of well over 25% during the last five years whereas the growth in imported wine was only about 20% and that too on a much smaller base. Today, only about 160,000-170,000 cases (9-liters) are being imported in a total market that has expanded to over 700,000 cases, due to the price anomaly.

Hotels were allowed duty free imports, subject to some restrictions, a couple of years later, making it possible for them to source wines at the cheapest rates in the world. But they focussed more on the bottom line than the top line thus providing for the rather stifled growth of imported wine consumption which was taking place because of a shift to wine culture for many reasons.

Several foreign liquor, wine makers and embassies started to complain to the EU, and a European Commission study was conducted, which determined that the combination of duties and taxes in some states in India was as high as 550 per cent on imported spirits and 264 per cent on wines, well beyond the norms agreed by India with the WTO. (An additional education cess of 1% had been implemented for al imported products from this fiscal)

Acknowledging this step, a ministry release confirms that some of the Indian trading partners (mainly EU and US) had complained that "the additional duty of customs is not equivalent to an internal tax within the meaning of GATT 1994, as the additional duty of customs exceeds the excise duty rates on like products in some Indian states".

The ministry also said that they had decided to withdraw the additional customs duty after discussing the issue with state governments.

While the Centre has acted on the additional customs duties, which fall within the Centre's domain, the government is expected to empower states to levy duties and allow them to recoup revenue losses. State governments are also expected to carry out a re-look of their duty structure to bring about parity between the levy on imported and domestic liquor.

The Centre could lose Rs 60 crore annually by removing the duty, at the present level of imports. However, they may recover a major chunk due to fillip that the imports will get by the expanded market.

The exact benefits to consumers can be calculated only when the states clarify their policy. There can be yet another twist to the ongoing drama of high duties. However, the center is planning to bring the countervailing duty (CVD) on imported foreign alcoholic beverages in line with the state excise duties through the Countervailing Duty on Imported Alcoholic Liquors Bill, 2007.

The Bill seeks to empower states to collect the countervailing duty on imported liquor, at the rate equal to each state's excise duty on domestically manufactured liquor. At present, the excise duty varies across states. Some states like Gujarat do not even allow the sale of alcohol. The Indian Constitution grants the states this privilege.