UNCLAS MUMBAI 000422


DEPT PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: EAGR ECON ETRD IN
SUBJECT: GOOD CHEERS FOR FOREIGN WINE IN MAHARASHTRA: STATE SPECIAL
FEE LOWERED

REF: 08 MUMBAI 0050


1. Summary: In August 2009, the Maharashtra government
significantly lowered the 200 percent "special fee" for foreign
wines imported into the state. Post recently verified that the
special fees are now just 44 percent or less ad valorem,
depending on the value of the foreign wine imported. The 200
percent duty had been assessed in addition to federal import
duties of 150 percent, putting most foreign wines beyond the
reach of even wealthy consumers, and was meant to match the
state's excise duty for domestic wines brought in from other
Indian states. Local wines made in Maharashtra continue to
enjoy exemptions from this excise tax, while domestic wine
manufactured outside Maharashtra is still taxed at 150 percent
and 200 percent of the manufacturing cost depending on whether
it is local or foreign branded. According to Maharashtra's
Excise Commissioner I.S. Chahal, this discriminatory treatment
of domestic out-of-state wine will continue until the tax for
Maharashtra-made wine is reciprocally lowered in Karnataka, the
other major wine producing state in India. Until this happens,
foreign wines will enjoy a duty advantage over domestic,
out-of-state wine brought into Maharashtra. End Summary.



2. In a recent discussion, I.S. Chahal, the Commissioner of
Excise for the Government of Maharashtra, informed Assistant
U.S. Trade Representative (USTR) for South and Central Asia
Michael Delaney that the special fee assessed on foreign wine
was changed from a flat rate to a three-slab inverse ad-valorem
structure on July 22. Since August, all foreign wines costing
less than INR 900 (about USD 19) have had to pay a special fee
of INR 400 (about USD 8.50) per one-liter bottle imported into
the state. The special fee for foreign wine costing between INR
901 (about USD 19) and INR 6,000 (USD 128) is slightly lower, at
INR 300 (about USD 6.40) per bottle, while expensive foreign
wine costing over INR 6,001 (USD 128) will be taxed at five
percent of the manufacturing cost. He admitted that the new
duty structure was devised and developed by the European
Commission which, along with Moet Hennessey, asked the
government to lower import duties for foreign wines in
Maharashtra. The Maharashtra government accepted their

recommendations and implemented the suggested tax structure
without making any changes, he said. These new taxes for
foreign wine in Maharashtra replace the old flat tax of 200
percent of the assessable value (manufacturing cost) which were
judged as unfair and unjust by foreign wine manufacturers.
Chahal admitted that the high tax rate for imported wine
encouraged a grey market in the state.



3. Chahal explained that since wine accounts for a mere one
percent of total excise revenues, the revision in the import tax
rate would not really result in any significant revenue loss for
the state government. He also noted most foreign wines are
priced over INR 900 (about USD 19) and very few Indian wines
fall within the same price range. Therefore, charging lower
taxes for importing expensive wine will not harm Maharashtra
wine producers since they do not compete in the premium market.
Nevertheless, to mollify the local wine producers, the
government ultimately raised the special fee from INR 300 (about
USD 6.40) to INR 400 (about USD 8.50) per bulk liter in the
final regulations, Chahal added. (Note: Maharashtra wine
manufacturers pay zero excise duty until December 2021 after
which they have to pay duty at the rate of 100 percent of the
manufacturing cost. End Note.) Chahal also claimed that he
told other officials in the state and central government that
continued WTO litigation was not worth the meager revenues this
special fee raised in the state.



4. Chahal also argued that the new state import duties placed
foreign wine on a better footing compared to domestic wine
produced outside Maharashtra. He noted that Maharashtra and
Karnataka were the only two major wine producing states in
India. Quid-pro-quo excise duty increases have led to
exorbitant price hikes for out-of-state domestic wines in both
states. Chahal said that the Maharashtra government was willing
to lower the excise duties for out-of-state wine if the
Karnataka government reciprocated in its treatment of wine
produced in Maharashtra. He said that he had written a letter
to the Karnataka Excise Commissioner assuring him that
Maharashtra would adopt the same excise duty structure for
Karnataka-produced wine that Karnataka adopts for
Maharashtra-made wine. Until then, all foreign-branded and
local-branded wine manufactured in Karnataka and brought into
Maharashtra will have to pay 200 percent and 150 percent of the
manufacturing cost as excise tax, respectively.



5. Comment: The duty revision for imported wine in Maharashtra
provides some relief to the foreign wine market who had
petitioned against the rise in state import tax which, they
believed, widened the gap between foreign and locally-made wine.
Even with the new duty structure, foreign wine remains a costly
alternative to home-grown Maharashtra wine. However,
ironically, it appears to now enjoy a pricing advantage compared
to out-of-state domestic wine, at least as long as the
inter-state price and tax war continues. The success of the
European wine trade association in rolling back the special
duties shows that in matters where states have discretion, such
as excise taxes, the most effective strategy is to deal with the
relevant state bodies in a constructive and persistent way. In
many cases, the central government does not have the authority
to force changes in state policies. End Comment.


FOLMSBEE