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The Foreign Trade Policy 2015-2020 announced last month by the Commerce Ministry has reduced the duty-free license limit of several deemed-export products from 10% to two categories at 5% or 3%. The category of Hotels, Restaurants and Catering has been placed in the 3% category, with the rider that the government will look at any revision on September 30, 2015.
The license allows the import of a wide range of imported goods including capital equipment needed directly for the business. This includes wines and spirits for the hotel industry. As the original format of Duty Free Entitlement Certificate was merged with SFIS, it also included perishables, consumables and food products.
Served from India Scheme (SFIS) earlier known as Duty Free Entitlement Certificate (DFEC) became effective in April 2003 when the NDA government with BJP as the majority party, ruled the government- just as today. The privilege was a direct result of the strong hotel lobby through the late Lalit Suri who was the then President of the Hotels Association of India (HAI). He and his Association were able to convince the Commerce Ministry that it was imperative to give duty incentives to bring the costs of imported wines and spirits down to attract more tourists and thus help tourism.
The undertaking given by the hotel industry then was that the cost savings due to zero duties would be passed to the hotel guests. Profit margins on wine were to be capped at 250% while the spirits had a higher cap of 400%. There was a feeble attempt to enforce the undertaking, at least on paper. But gradually, it was totally bypassed; today most 5-star hotels have ridiculous, high prices with mark-ups ranging from 500- 700% in some cases, with a few exceptions. Some hotels even have an internal policy of adding the otherwise applicable customs duty back to the notional costs and then apply the mark-ups, the logic being that the duty-free incentive was a perk due to the export earnings of the hotels and was not meant to be passed on to the consumer.
Most 5-star hotels have had adequate licenses @ 10%, some of them not even being able to utilize the whole amount available to them. However, there has been a gradual shift towards the import of cars, curtains and carpets and the likes of them. Cars worth millions have been reportedly imported against these licenses, ostensibly to fetch VIP customers from and to the airport or otherwise decorating the hotel lobbies.
With the duty-free license limit going down to 3%, the hotel industry is expected to use the license more prudently. There is general consensus among the importers dealing with on-trade that the curtailed limit might not have much impact on the hotel wine and spirits purchases or wine list prices even though the finance departments might insist on firming up of the prices and in some cases even increasing them.
But stand-alone restaurants and the small heritage properties and boutique hotels with 50-60 rooms and attracting mainly expats as customers, are likely to be hit as the reduced limit may not be enough to buy the total quantity required. Same may hold true for the smaller stand-alone restaurants whose export earnings (billing through international credit cards) are barely enough to meet their purchase requirements of wines and spirits.
Time will tell the impact of the reduction in the duty-free licenses to 3% but the prices may firm up in the hotel price list and if at all, the new policy will be marginally detrimental to their sales, the pragmatic hotels’ aggressive policy to price the wines to actually sell them notwithstanding.
For details of the reduction, please visit Highlights of the Foreign Trade Policy 2015-2020
(relevant Page 28, item 7a and b)
Subhash Arora |