India's move to exclude bulk Scotch imports from a reduced 75 per cent tariff goes against provisions agreed in an India-UK trade deal, a group representing liquor makers Diageo and Pernod Ricard wrote in a letter seen by Reuters.
Whisky tariffs were a sticking point during the years of protracted negotiations leading up to the deal's July 15 implementation, though India ultimately agreed to halve import taxes on certain Scotch imports from 150 per cent to 75 per cent immediately and to 40 per cent over 10 years.
The British government said "iconic UK products" like whiskies would benefit from the pact. Indian investigators, however, have privately told companies the reduced rate does not apply to bulk Scotch concentrates, creating the first significant dispute over the free trade agreement since it took effect.
India's Directorate of Revenue Intelligence searched the offices of Pernod and Diageo and questioned executives this month as part of an investigation into whether they misclassified imported products to benefit from the reduced rate.
Classification issue risks undermining pact, group says
In a letter to India's commerce minister on Friday, the International Spirits and Wines Association of India wrote that the classification issue "risks undermining, in practice, an important market-access benefit negotiated and agreed between India and the United Kingdom".
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"The preferential tariff treatment negotiated ... could effectively become unavailable for these imports," continued the letter, a copy of which was seen by Reuters.
ISWAI declined to comment on its letter, while India's commerce ministry did not immediately respond.
Pernod, which counts India as its biggest market by volume, declined to comment. Diageo did not respond to a request for comment. Both told Reuters earlier this week that they were cooperating with Indian authorities carrying out the investigation.
In the British government's first comment on the controversy, a spokesperson said: "We are working with the government of India to resolve this issue to ensure UK businesses can export under the tariffs agreed in the trade deal."
Import tariff disputes have long been a sore point for foreign investors in India, who have in the past faced demands for large amounts of back tax. Such disputes have embroiled the likes of Samsung and Volkswagen.
Pernod faces antitrust cases in India and a $314 million back-tax demand from Indian authorities, who accuse it of undervaluing some imports. The company denies wrongdoing.
Big implications for India's drinks sector
ISWAI's letter underscores the shockwaves the investigation has sent through India's $65 billion alcohol market. Britain accounts for almost 75 per cent of India's imported spirits, primarily driven by Scotch whisky, according to Crisil Ratings.
Indian government inspectors have told companies that they do not benefit from the reduced 75 per cent tariff on bulk imports of Scotch concentrates, which must be declared under a customs classification that attracts a 150 per cent duty, three people with direct knowledge of the matter told Reuters.
Pernod and Diageo import bulk concentrates, mixing them with other ingredients to produce hugely popular Indian brands like Royal Stag, Blenders Pride and McDowell's.
The three people said companies including Diageo and Pernod believe concentrates imported from Britain should benefit from the new, lower tariff. ISWAI said in its letter that the India-UK agreement expressly provides preferential tariff treatment for whisky under the relevant tariff lines.
An urgent clarification could ensure market-access benefits negotiated by India and Britain are realised "while avoiding uncertainty and disruption for legitimate industry participants", the letter said.
On Saturday, the UK-based Scotch Whisky Association told Reuters in a statement that the import of bulk Scotch is key to whisky's overall success in India and that upholding the core principles of the bilateral pact is vital.
The association, which counts Diageo and Pernod's Chivas Brothers as members, added the industry was "committed to working in partnership with the UK and Indian governments on the smooth implementation of the deal", so its benefits are unlocked.
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