The Hindu Business Line : WTO: Battle of the bottle

The dispute at the WTO between the US and the EU (not counting the other countries which have joined issue secondarily with New Delhi on the subject) on the one hand and India on the other on the imposition of import duties on wines and distilled products is basically one of protection for the Indian wine and spirits industry. This is a fact well-known across the board. The central point of the charge made against New Delhi by the complainants is that, in its effort to pro tect Indian industry, relevant WTO rules have been flouted.

The bound import tariff rates for wines and distilled products are 150 per cent for both categories (that is, India is within its rights to impose a basic Customs tariff at this level on such imports from fellow WTO members). For liquor distilled products, the basic Indian Customs duty is at the maximum level of 150 per cent. For wines, the corresponding rate was 100 per cent at the time the two complaints were lodged in Geneva, meaning that the basic Customs duty on wines could be raised by another 50 per cent without violating any WTO stipulations.

As far as the basic Customs duty is concerned, the actual levels applied to both categories of products are, therefore, within the relevant WTO stipulations. In fact, after the July 3 amendment in the Customs duties applicable to wine and distilled product imports, this position has been maintained by New Delhi (the wines basic impost being increased to the ceiling of 150 per cent). But the basic Customs duty has never been the offending element in the entire issue. Both the EU and the US have pointed their guns at the additional duties levied on these imports, their contention being that if the ‘integrated’ imposts on the imports is considered, they far exceed the bound WTO rates on the products in question, and are, therefore, to that extent violative of the rules of the organisation.

On shaky ground

In both the disputes, panels have been set up which, ordinarily, means that the process has begun which will take quite a few months before a final settlement is reached. On the face of it, therefore, there was no reason for New Delhi to have taken any remedial action in a hurry. And yet it did — and it is clear for no other reason than the fact that, as the two complaints stand, India is on shaky ground as far as defending its position on the additional duties is concerned. Indeed, there is no way in which New Delhi can describe the additional Customs duties as any other impost but import tariffs. As such, there can be no defence against the charge that India has been levying total tariffs on the import of wines and distilled products in excess of what it is entitled to under the WTO rules.

In fact, the point can even be made by the aggrieved parties that they had, on their own volition, deliberately refrained from taking action they are entitled to under the relevant WTO rules ever since the additional imposts were levied in 2001 following the end of the quantitative-restriction regime in order to allow time for a “level playing field” to be built for domestic manufactures of the products concerned. Both the EU and the US can now argue that — since six years is a long enough time (in their view) for the domestic manufacturers to have taken necessary action to strengthen their position — New Delhi ought to have voluntarily taken steps to scale down the ‘protection’. Since this has not happened in the normal course, Washington and Brussels have decided to approach the WTO dispute settlement mechanism to rectify the situation and give their own wines and distilled products industry a “level-playing field” in the Indian market.

New Delhi’s strategy is clear. The ‘violations’ on the Customs duty front have been done away with with the withdrawal of the additional imposts. This means that “bottled in origin” wines and distilled products will now cost less in the domestic market than they used to. But then these products — as they have always been — will be competing with Indian wines and distilled products which, however, are heavily taxed by the State Government under their own policies.

Under the “national treatment” rules of the WTO, imported products will have to be treated on an equal footing with domestic products so that the former is not discriminated against in any national market. Since the inverse should also be true — that is, domestic products should also not be treated unfairly vis-À-vis imported products — in this particular situation, the States are free to impose their own taxes on the imported products to a level which is equivalent to the taxes levied on the domestic products — thereby robbing the imported products of the advantage conferred on them by the withdrawal of the additional Customs duties at the Central level.

Future course of action

Both the US and the EU are, of course, aware of this policy alternative settled on by New Delhi and it will be interesting to see how they tackle this obstacle on the road to facilitating higher sales for their own wines and distilled products. One can perhaps even assume that their future course of action has in fact been thought out when they framed their complaints to the WTO. The EU has done this explicitly enough by including, in its official complaint, specific “restrictions on sale applied by the Indian State of Tamil Nadu”, which can easily be covered by the “national treatment” argument (if Brussels chooses to do so in the future).

Specific reference has been made to Article III:4 of GATT 1994 which says that imported products “shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use”. Further, Article XI has been invoked which says, among other things, that imports will not be subjected to any “prohibitions or restrictions other than duties, taxes, or other charges”.

Of interest is the point that the “contracting party” here is the Indian Republic, which is assumed to represent its constituent States. What happens if the complainants choose to view the additional taxes imposed by the States on imported products as being equivalent to taxes imposed by the “contracting party” (which is the Indian Republic) and then argue that since the ‘integrated’ incidence of the imposts is higher than the bound rates for the products concerned, they should be struck down?

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