Diageo and Pernod Ricard, a group representing liquor companies, have said that India’s move to exclude bulk scotch (scotch imported in bulk) from the reduced tariff of 75 percent is against the terms of the India-UK trade agreement. Prior to this trade agreement, which entered into force on July 15, tariffs on whiskey had been the subject of great controversy during protracted negotiations lasting several years. However, India eventually agreed to reduce import duties on certain types of Scotch from 150 percent to 75 percent immediately and to 40 percent over 10 years.

The British government said “key UK products” such as whiskey would benefit from the deal. But, Indian investigators have privately told the companies that the reduced rate will not apply to bulk scotch concentrate. This is the first major dispute since the implementation of the FTA. According to a Reuters report, India’s Directorate of Revenue Intelligence (DRI) this month inspected the offices of Pernod and Diageo and questioned their officials. The probe is being conducted to find out whether these companies have misclassified the imported products to take advantage of reduced rates.

This issue regarding classification can undermine the deal

In a letter to India’s commerce minister on Friday, the International Spirits and Wine Association of India (ISWAI) said the classification issue “could materially undermine the significant market-access benefits negotiated and agreed upon between India and the United Kingdom.” As such, the concessional rates agreed for these imports may not be available, the letter seen by Reuters added. ISWAI declined to comment, while India’s commerce ministry, its biggest market, also declined to comment. Earlier this week, both companies told Reuters they were cooperating fully with the investigation.

Work is being done

In the British government’s first response to the dispute, a spokesman said: “We are working closely with the Government of India to resolve this issue, to ensure that UK businesses can export under the tariffs set out in the trade agreement.” The dispute over import tariffs has long been a source of trouble for foreign investors in India. In the past, these investors have faced demands to pay huge amounts of back taxes. Companies like Samsung and Volkswagen are also embroiled in such controversies. Pernod is facing an antitrust case in India. Apart from this, the Indian authorities have demanded a tax refund of $314 million from the company. Officials alleged that the company undervalued some imported goods. The company has denied any wrongdoing.

A major impact on India’s drinks sector

ISWAI’s letter points out that the investigation has shaken India’s $65 billion liquor market. According to Crisil Ratings, about 75% of spirits imported into India come from Britain, mainly Scotch whisky. Three people with direct knowledge of the matter told Reuters that Indian government inspectors had told the companies that they would not benefit from the 75% duty reduction on bulk imports of Scotch concentrate. Officials say this should be declared under such customs classification, which carries 150% duty.

Companies like Pernod and Diageo import in bulk from Britain. They then blend it with other ingredients to make very popular brands in India like ‘Royal Stag’, ‘Blender’s Pride’ and ‘McDowell’. The three said companies such as Diageo and Pernod believe new and lower duties should be imposed on concentrates imported from Britain. ISWAI in its letter said that the India-UK agreement clearly provides for preferential tariff treatment for whisky.

An explanation should be given soon

The letter said that soon we will be able to take advantage of the agreement reached between India and Britain by getting clarification on this. Further, this will not create problems like uncertainty and disruption in operations for legally operating companies. On Saturday, the Britain-based Scotch Whiskey Association said in a statement to Reuters that bulk imports of Scotch are critical to the success of whiskey in India. Apart from this, it is also necessary to maintain the core principles of the agreement between the two countries. Diageo and Pernod’s company ‘Chivas Brothers’ are also included in this association. The association said the industry as a whole is committed to working with the governments of Britain and India to ensure the smooth implementation of the agreement, so that benefits can be reaped.