The protectionist Maharashtra has come out with a state excise policy for wine and alcohols in a deft manner that seems to kill three birds with one stone, but threatens the growth of imported wine segment and  with customs suspending bonding till its formalities are met, business has been totally crippled,

In an apparent move to thwart the purported aggressive stand from the US which has filed an appeal against the decision taken by WTO against its complaint about the unfair trade practise by India, the policy aims to silence the complainants since the similar unfair policy is already in place for out of state domestic wines.

Secondly, The excise department has silenced the wine-loving critics by increasing the excise duty on imported liquor to 200% whereas for reasons not difficult to fathom, it had reduced it last year to as low as 75% for higher priced spirits. Now there will be a uniform duty of 200% for spirits, raising the cost of liquor when the new material starts rolling out of the excise warehouses.

Thirdly, the policy is obviously a protectionist one for the Maharashtra wineries. They are now fully protected against out-of state Indian wines (read Grover Vineyards) but also imported wines.

Manufacturing Cost vs. Assessable Value

The biggest coup by the department has been loosening its grip on the assessable value on which 200% excise duty is payable. For the Indian wines from out of Maharashtra, the excise duty of 150% is leviable on the manufacturing costs, which do not include the marketing and finance overheads or the profits. The importers' had taken the plea that the manufacturing cost was lower than the assessable value which included the marketing costs and profits.

Kapil Grover, majority owner of Grover Vineyards had been practically the lone victim of the divisive policy of Maharashtra. ' We have been paying 100% excise duty as out of state winery since the beginning of the liberalised state policy which was announced in 2001' This was increased to 150% 2-3 years back, making him take a hit in his profits.

Not more than four times your cost, buster

Reason for the hit is a condition in the excise policy which states that the Retail price cannot be more than 4 times the declared manufacturing costs. If the product is listed at Rs.100 a bottle as manufacturing cost, the excise duty has to be paid at Rs.150. The MRP of Rs. 400 would allow the manufacturer Rs.150 which would include about 12% retailers margin, 12% distributor's margin, 7% octroi and other warehousing, storage, logistics, marketing overheads and the profits.

Apparently, the 4X formula is to be applied for imported wines also. Let us say the wine has currently an assessable value of Rs.200. The importer feels that the manufacturing cost, keeping Grover Vineyard example, would be Rs.100 and not Rs.200. Fine, says the excise department. Make it Rs.80, if you wish. 'But your MRP would be Rs.100+Rs.200 (excise)+ Rs 100 only (overheads and profits). Additionally, the customs duty (150%) and VAT (@20%-in this case Rs.110- on the total cost may be charged additionally from the customer.'

It is this policy which is making importers going into tizzy. The overheads are based on the total costs-including the customs duty. Going by the formula, the retail, distributor margins etc are payable on the total costs(4.5X) and not on the 1X basis, they claim.

Their plea seems to be totally justified, at least for the low end wines and on sales where the custom duty has to be paid and then total billing done, say for retail.

Just you wait Mr Grover, just you wait

Kapil is not aware of the fact that soon there will be a notification coming, increasing excise duty on his wines also to 200%. The government may not be inimical to him or his winery but the step may be mandatory to ward off the attack from WTO. Once the duties are pared for both imported and Indian wines, India would have fulfilled their obligation, or so they would appear to feel. Only time will tell how things take shape.

But, in the meantime consumer will continue to suffer and bootleggers will prosper as the legal prices are expected to go up..

Business suspended due to excise

Throwing salt on the wounds, excise clearance of the products is not being allowed though no official circular has been issued. Over 7 weeks have gone by without any fresh deliveries, according to most importers I talked to. Given a chance or the strength to form an association, they could file a case against the department for not letting them do business-especially when they have paid Form K charges (the annual license fee) for the full year (last year business was suspended for 4months by the department).

But due to fear of retaliation and individual victimisation they neither  want to be singled out nor can they take the necessary, just course. They have instead joined boxing classes or bought punch bags to address their frustrations.

For over three weeks, the grapevine has it that someone or the other has talked to a senior bureaucrat known personally to him and he has leaked the information that the final policy is being announced in 2-3 days. No wonder, people are keeping fingers crossed that it will be announced next Tuesday so they can at least commence business and take care of unfilled orders.

States were asked by the central government last July to levy 'special fees' on imported spirits and wines to offset the revenue loss arising from the withdrawal of ACD-additional customs duty, levied on imported wines and spirits. The government feels that it would stand the legal test if there ever were a case against it, by calling the excise duty by a different name- 'special fees'. But US is not buying this argument apparently and proceeding with the appeal.

Customs Woes

Excise is not the only hostile border faced by importers. Customs is also creating enough problems for them and today no material is going into or coming out of the privately owned public bonds. The customs department is insisting on the submission of bank guarantees to the extent of 25% of assessable duty that would be payable on the material stored.

' Would be payable' is the point of contention with many importers. Says Dharti Desai, CEO and Founder of Finewinesnmore , who has already invested over Rs.40 million ($1 million ) in the business, ' I can understand the government asking for the bank guarantee on wines on which duty is payable. But in cases like ours, where most  sales are to the duty free customers, where is the sense of insisting on the guarantees on these wines too.' 'and where are we going to get funds to block in the business in which we are finding difficult to break even,' she says in desperation.

Explains another smaller importer under conditions of anonymity, 'under the RBI rules, when the banks give a performance guarantee, it can be issued against margin money, But when the guarantee involves an obligation towards the revenue department of the government, banks insist on 100% margin. This implies investing 25% of the duties payable on the whole lot including the duty-free goods. This will work out as the average equivalent of total duty payable on wines.'

Mr. Koshi of Veritas in Mumbai, one of the finest privately owned public bonded warehouses, goes a step further. 'Why should the importer be asked to pay the bank guarantee at all?' he claims. 'The customs department does all kinds of verifications including the solvency details etc. The keys to the premises are with the officials. They should be on top of things and know when to step in with a heavy hand.'

The bone of contention arises also because the government owned bonds are exempt from giving these guarantees. In fact warehouses like CWC are in such a pathetic condition (service and storage is disgusting according to most importers I talked to in Delhi and Mumbai) that no importer wants to deal with them 'unless you are storing crappy wines, anyway'.

So committed is Koshi that he and Suntan of Mumbai filed a writ petition challenging the discrimination against the privately owned public bonded warehouses. These warehouses which are doing a yeoman's service to the consumer by storing the wines properly, have been asked by the customs department to submit bank guarantee applicable for the dutiable sensitive goods lying with them- in fact telling them to do the impossible and close the business.

Fortunately, as I have learnt from reliable sources in Mumbai the department has had the common sense of following what has been done in Delhi and decided to accept the bank guarantee from the individual importers directly. The suspended business can hopefully be allowed to start functioning for those who give the guarantee (with no guarantee that the excise department will allow to transfer the stuff out of the excise warehouse, though) and the wines cooking in various areas in the port would find a place of rest.

You may love Maharashtra or hate Maharashtra, but you have to proclaim, 'Mera Maharashtra Mahan!'

Subhash Arora
August 23, 2008