India's investigation into the Scotch whisky imports of global liquor giants Diageo and Pernod Ricard is creating the first significant dispute over the India-UK free trade agreement since it took effect, with the industry warning that the probe risks undermining, in practice, an important market-access benefit negotiated between the two countries.
The dispute centres on bulk Scotch imports. Diageo and France's Pernod Ricard dominate India's 65-billion-dollar alcohol market, and both companies import bulk Scotch concentrates in containers, which are then mixed with other ingredients to make popular brands such as Royal Stag, Blenders Pride and McDowell's.
Under the India-UK trade pact, which took effect on July 15, India agreed to slash import taxes on certain Scotch imports from 150 per cent to 75 per cent immediately, falling to 40 per cent over ten years. Whisky tariffs had been a sticking point during years of protracted negotiations, and the British government said "iconic UK products" like whiskies would benefit from the pact.
Indian investigators, however, have privately told companies that the reduced rate does not apply to bulk Scotch concentrates, creating a sharp divergence between the deal's headline promise and its application on the ground. 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.
Tax inspectors argued that the duty relief did not apply to bulk concentrates, and the tax department is concerned that bulk imports are being wrongly classified.
The investigation widened this week. Indian tax officials visited Allied Blenders' Mumbai office and one manufacturing facility on Wednesday as part of an industry-wide review of customs classification of bulk Scotch imports. Allied Blenders said the visit would have no impact on the company's finances or operations, but the visit confirmed that the review extends beyond the two multinationals to the wider industry.
Now the industry has pushed back in writing. In a letter to the commerce minister on Friday, the International Spirits and Wines Association of India, a group representing liquor makers including Diageo and Pernod Ricard, wrote that the classification issue "risks undermining, in practice, an important market-access benefit negotiated and agreed between India and the United Kingdom."
The letter, a copy of which was seen by Reuters, continued: "The preferential tariff treatment negotiated... could effectively become unavailable for these imports."
The association declined to comment on its letter, and India's commerce ministry did not immediately respond. Pernod, which counts India as its biggest market by volume, declined to comment, and Diageo did not respond to a request for comment. Both companies told Reuters earlier in the week that they were cooperating with Indian authorities carrying out the investigation.
The stakes are considerable. The United Kingdom accounts for almost 75 per cent of India's imported spirits market, primarily driven by Scotch whisky, according to Crisil Ratings. The British government said in July that the UK's whisky exports to India were worth more than 200 million pounds in 2022, and the tariff cut was presented as one of the headline gains of the trade pact for British exporters.
If bulk concentrates — the form in which much Scotch actually enters India for blending into mass-market brands — are excluded from the reduced rate, a large part of that gain could evaporate.
For the Indian companies and consumers, the dispute also matters. Bulk Scotch concentrates are the raw material for some of India's highest-selling whisky brands, and any change in their tariff treatment could affect costs across the industry.
The investigation is, at its core, a customs classification question: whether a bulk concentrate, imported in containers for blending, counts as the kind of Scotch import that qualifies for the pact's preferential rate, or whether it falls into a different category that remains subject to the higher duty.
Both sides have reason to be cautious. India has a long history of tax disputes with multinational companies, and Pernod Ricard is already facing antitrust cases in India, its biggest market by volume, along with a 314-million-dollar back-tax demand for allegedly undervaluing some imports, which the company denies.
Diageo, meanwhile, agreed in August to reformulate some of its most popular drinks after the country's food safety regulator banned them in some states for adding flavours against regulations. Against that backdrop, the companies have emphasised cooperation with the investigators, even as their industry association warns that the classification stance could hollow out the trade deal's benefits.
The dispute is also a test of how the India-UK pact will work in practice. Trade agreements are only as good as their implementation, and the first significant disagreement over the pact's interpretation has arrived within months of its entry into force.
How the commerce ministry responds to the industry's letter, and how the Directorate of Revenue Intelligence's investigation proceeds, will signal to British exporters and to other trading partners whether the preferential rates agreed in negotiations will be honoured at the border.
For now, the investigation continues. Tax inspectors reviewed documents related to bulk Scotch imports during their visit to Pernod's India office, though they have not been in contact since, according to people familiar with the matter.
The industry's letter to the commerce minister is an attempt to resolve the issue at the policy level before it hardens into a prolonged dispute, and before the tariff benefit that was so hard-won in negotiations becomes, in the industry's words, effectively unavailable.
The coming weeks will show whether the two governments can find a shared reading of the pact's whisky provisions, or whether the first major test of the India-UK trade deal becomes a protracted standoff. For an agreement that was celebrated as a landmark in the bilateral relationship, the Scotch question is an early and unwelcome complication — one that will be watched closely by exporters, importers and trade negotiators on both sides.
The episode also underlines how much of modern trade policy turns on technical detail rather than headline tariff rates. A cut from 150 per cent to 75 per cent makes for an impressive announcement, but its real value depends on customs classifications, product definitions and the treatment of bulk shipments that rarely appear in political speeches.
For British distillers, whose Scotch is shipped in bulk for blending into India's mass-market brands, that technical question is the difference between a genuine market opening and a benefit that exists on paper but not at the port. The industry's letter is, in effect, a plea for the spirit of the agreement to govern its letter.
(Reporting based on Reuters.)