Exclusive: France’s Pernod halts new investment in India, citing protracted tax fight

  • Pernod at odds with Indian authorities on tax issues
  • Differences between the two countries in the assessment of alcohol imports
  • Pernod told Prime Minister Modi’s office that the disputes affect investment
  • A French spirits company, one of the largest liquor companies in India

NEW DELHI, July 12 (Reuters) – French spirits group Pernod Ricard ( PERP.PA ) has put new Indian investment on hold due to long-standing tax disputes with authorities over the valuation of alcohol imports, according to two sources with direct knowledge and company letters seen by Reuters.

The world’s second-largest spirits group said its legal disputes have progressively worsened since they began nearly 30 years ago, making it harder to do business in the country and raising the prospect of a major financial hit.

The maker of Chivas Regal, Glenlivet Scotch whiskey and Absolut vodka has been lobbying Indian authorities, including Prime Minister Narendra Modi’s office, to resolve the issue.

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“This ongoing litigation is a major strain on our ease of doing business and is preventing new investment from our Paris (France)-based group to expand business in India,” Pernod wrote in a Nov. 24 letter to Modi’s office.

“These disputes first arose in 1994 during the assessment of imports by customs authorities, have become more complex year after year and are still ongoing.”

Pernod’s stance casts a shadow over the company’s future growth in a region it says is among its “key strategic markets”. India and China, the world’s two most populous nations, are expected to drive most of the alcohol industry growth over the next decade. Read more

India’s $20 billion alcohol market is expected to grow at 7% annually over the period 2021-25, with whiskey and spirits among the frontrunners, says the IWSR Drinks Market Analysis. Pernod accounts for 17% of the country’s alcohol market by volume, while Diageo has a 29% share.

In its letters, Pernod said it had a disagreement with officials over how the company values ​​its imported alcohol bottles and raw materials and pays tax on them. The first source said Indian authorities often claim Pernod is undercutting import costs, which attracts a 150 percent federal import tax.

Enclosing the letter to Modi, Pernod wrote to India’s Central Board of Indirect Taxes and Customs (CBIC) on May 27, saying the lack of certainty in the valuation of imports is hitting its current business and having a “severe impact” on expansion plans.

The CBIC and Modi’s office did not respond to requests for comment on the letters, which were not previously reported.

Pernod, in a statement to Reuters, said it was in “constant dialogue” with Indian authorities as it sought to find a “quick solution to this long-standing issue”.

The company is gathering all relevant information to support a proper reassessment by the authorities and aims to preserve Pernod’s rights while “avoiding any business disruption,” the statement added.

“FINANCIAL BURDEN” RISK.

Foreign companies in other industries have also had concerns about India’s tough regulatory regime, where Modi is seen as encouraging local businesses. Global automakers, including Tesla Inc, for example, have for years complained about high taxes on imported cars and electric vehicles.

In its November letter, Pernod shared its upcoming business proposals for India, which include a plan to set up new production lines to increase capacity by more than 40% annually by 2025 and increase export earnings by a third to $126 million in the next five years.

The company’s plans are moving very slowly in light of the litigation and “everything is on hold,” the first source said of the company’s new investment plans.

His written pleas to the Indian officials demanded a reasonable settlement of the disputes, asking for “sympathetic consideration”.

The letters point to two issues: disputes in various tribunals over the valuation of the concentrated alcohol that Pernod uses for local alcohol production; and disputes involving “bottled origin” products such as Chivas, which are imported in bottles.

For both types of imports, Pernod’s methods of calculating costs and paying taxes on them have been questioned by authorities, often resulting in shipments being held at various ports, according to the first source and the company’s May 27 letter.

In the case of imports of bottles such as Chivas, in particular, the authorities propose to add advertising and promotion costs to the import value and pay tax on this, a methodology that Pernod disagrees with, the letters state.

Any increase in taxes, which must be refunded many years after the products have been imported, could “expose the company to a huge financial burden,” Pernod said in its May announcement.

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Reporting by Aditya Kalra in New Delhi; Editing by Muralikumar Anantharaman

Our standards: The Thomson Reuters Trust Principles.

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