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Breweries Opinion - Taxation Columns - Detaxfication A heady cocktail of views about tax getting lighter on liquor
D. MURALI
The increase in basic Customs duty has been made to bring the import duty in line with accepted international practice, while the abolition of countervailing duty was regarded necessary as the levy was being seen as an unfair trade practice.
The Government’s recent decision to remove additional Customs duty on imported liquor, wine and spirits has led to a heady cocktail of views and opinions in the public domain on the impact of the move. According to some quarters, it is too early to assess the impact of these changes on the duty regime on alcoholic products. The move came in response to the long-standing complaint of the European Community and the US that such additional duties are discriminatory in nature and hence not in accordance with the WTO Agreement. Significant development
Mr S. Madhavan, Leader (Indirect Tax Practice), PricewaterhouseCoopers, believes that though the move is a significant development in the context of the country’s tax treatment of imports of such products, there is no certainty that the status quo will exist in relation to the existing State excise/sales taxes on alcoholic products. Speaking to Business Line on the ramifications of the move, he said: “It is possible that States may seek to augment revenues by enhancing the State taxes on these products, as a response to this elimination of additional Cus toms duties by the Centre.” Given that the basic Customs duties are still 100-150 per cent of the value, the impact of these changes will differ from the higher priced alcoholic products to the relatively lower priced ones, he added. But Mr Vivek Sharma, Senior Manager, Ernst & Young, says that the relief is only partial. “Though the additional Customs duty has been abolished, import duty on bulk scotch and concentrates used for bottling and blending remains unchanged at 160 per cent.” Besides, he added, the move will have a limited effect on customers as these products currently have only 3-4 per cent market share. “The reduction in duties for wines and bottled spirits may only lead to a shift in purchase of these products through regular channels in place of the grey market suppliers.” Impact on consumers
Since certain States are likely to levy countervailing duty in the absence of such a levy by the Centre, the effective impact on the consumer would therefore depend on the action of the States concerned, according to Mr D. Arvind, Partner (Indirect Tax), KPMG. “The reduction in the effective Customs duty would go to reduce the price of imported alcoholic beverage provided the States choose not to impose countervailing duty on such goods.” And decentralising the duty collection on consumer products will lead to price differential and result in movement of goods across States, which is not in the interest of consumers, said Mr S. Tirumalai, Partner, Deloitte Haskins & Sells. “This will be due to commodity preferences by dealers, driven by tax consideration rather than by consumer preferences. We have seen this happening in many consumer products such as biscuits, cigarettes and tea.” The States may be able to impose the levy through notifications, as a higher VAT percentage or hike the excise duty, he added. Besides, transaction costs and compliance hassles will increase “because instead of one authority deciding on the tax, you will now have 27 States and seven Union Territories. What the new policy means to the exporter to India will be driven by the ultimate price to the consumer.” Stating that the annual consumption of imported liquor is estimated to be 125 million cases, worth over Rs 30,000 crore, Mr Arvind said that a clear picture would emerge only after States make their positions clear in this regard. “The countervailing duty on alcoholic liquor was being imposed in lieu of State excise duty. With the abolition of countervailing duty, it is unclear how States will take this to their advantage.” The increase in basic Customs duty has been made to bring the import duty in line with accepted international practice, while the abolition of countervailing duty was regarded necessary as the levy was being seen as an unfair trade practice, he added. Pointing out that the Government has attributed the abolition of additional duty to public interest, he said that this reason is disturbing and defies logic. Public interest
“Is it in public interest that the duty on liquor should be abolished? Is it the Government’s intention to increase the propensity of liquor consumption among the public? “We are at a loss to understand how public interest is being served by reduction in duty on imported liquor.” Whether in public interest or not, the new duty structure is expected to increase the import of foreign liquor, according to Mr Sharma. “It may provide competition to premium products of the domestic manufacturers of IMFL and local wineries. The retail prices of non-premium imported liquor and wines may be able to match the prices of premium liquors and wines produced in India.” According to Mr Madhavan, the real policy challenge facing the tax regime on alcoholic products is determining the optimum level of taxation that should apply on such products, “in order to discourage its consumption as a measure of the stated public policy and yet ensure that the manufacture and sale of such products is carried out a legitimate manner and not driven underground.” He added: “It is already well known that a significant black market exists in relation to these imported products. This challenge and the response to it will determine the future growth of this industry.” Mr Madhavan also believes that as a result of the altered duty regime, prices of imported alcoholic products could possibly undergo changes, as the intent would typically be to obtain market access and increase market share. “In other words, affordability of such products will be the key to consumption and the market responses to the elimination of the additional duties could therefore vary.” A Joint Working Group (JWG) constituted by the Government to frame the model taxation structure on alcoholic products for States had made its recommendations a few months ago. “The latest development is that the an entirely different JWG, constituted by the Empowered Committee in relation to the introduction of the GST, has been requested to recommend an appropriate model for alcoholic products under the GST. “It will be interesting to see what recommendations this particular JWG will come up with on alcoholic products. The situation is very fluid and dynamic.”
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