For the spirits industry, the headline was simple: the basic customs duty on eligible Scotch whisky would drop immediately from 150% to 75%, with a path to 40% over a decade. The British government declared that "iconic UK products" like whisky would benefit, and the Scotch Whisky Association (SWA) told the UK Parliament the cuts would apply to both bottled and bulk exports.
Three months later, that promise is under scrutiny. India's Directorate of Revenue Intelligence (DRI) has searched the offices of Diageo and Pernod Ricard and questioned executives. The agency's concern, according to multiple sources, is that bulk Scotch concentrates—the spirit shipped in containers to be blended locally into popular Indian brands like Royal Stag, Blenders Pride, and McDowell's—do not qualify for the 75% rate. Instead, investigators argue these imports should be classified under a customs line that attracts the full 150% duty.
The dispute is not about a new tax increase. It is about interpretation. If the DRI's view prevails, the companies lose the duty relief they had counted on, and potentially face demands for back-duty, interest, and penalties on every consignment since mid-July. The case has become the first major enforcement test of the trade deal, sending shockwaves through India's $65 billion alcohol market.
The immediate financial impact depends on how much bulk Scotch the companies import and how much of their cost base it represents. Neither company discloses these figures, so the exact hit is unknown. But the mechanics are clear.
Under the agreement, qualifying Scotch imports land at 75% duty. If bulk concentrate is forced back to 150%, the landed cost of that input jumps by roughly 43% compared to the preferential rate. This is not a new cost—it is a return to the pre-July status quo—but it removes a significant margin tailwind that management had baked into their plans.
For United Spirits, the Diageo India subsidiary, bulk Scotch is the only structurally inflationary input commodity. Management had expected the trade deal to offset that pressure over time. In recent quarters, gross margin has hovered around 47%, with price/mix expected to broadly neutralize cost inflation. If the duty benefit evaporates, that balancing act becomes harder. Transcript +2
The effect on gross margin depends on the share of bulk Scotch in net sales. A simple sensitivity analysis shows that if bulk Scotch accounts for 10% of sales at the 75% rate, a move to 150% would hit gross margin by about 4.3 percentage points. The actual number could be higher or lower, but the direction is clear: margins compress unless the companies can pass the cost on to consumers.
Passing it on is easier said than done. State governments in India set excise duties, prices, and distribution rules. The trade deal does not touch these, so a halved customs duty does not mean a halved shelf price. United Spirits has already taken only modest price increases and expects a muted response to hikes, citing regulatory constraints. In Karnataka, the company recently cut prices by 10–15% across the portfolio, showing that pricing power is often limited. Transcript +2
The dispute also raises strategic questions about how these companies source their products. Bulk imports account for an estimated 79% of Scotch shipments to India. This bulk spirit is a small but crucial input in blended Indian whisky, which is legally classified as whisky in India even though it often uses neutral spirit derived from molasses.
If bulk stays at 150%, the companies face a choice. They could absorb the cost, reduce the Scotch content in their blends, substitute Indian malt or neutral spirit, or shift sourcing. None are ideal.
Sourcing from outside the UK does not solve the duty problem. Under the agreement's rules of origin, only UK-origin goods qualify for the preferential rate. Non-UK imports would likely face the full 150% anyway. Switching to finished Scotch imports—bottled-in-origin brands like Johnnie Walker or Ballantine's—would mean paying a different tariff line, but the per-litre cost of finished Scotch is typically higher than bulk, even after duty, due to bottling, packaging, and brand premiums. This makes finished Scotch a poor substitute for the bulk input used in mass-market blends.
However, Indian single malt is a small category—around half a million cases—and is not a near-term substitute for the volumes in mass brands.
Pernod Ricard has already signaled a strategic shift. In July 2025, it sold its mass-market Imperial Blue brand to Tilaknagar Industries for €412.6 million, saying the deal would allow it to focus resources on premium brands like Royal Stag, Blenders Pride, and international labels. The company has also announced plans to build a €200 million distillery in Maharashtra to produce its own malt, reducing dependence on external sourcing for Indian malt. These moves predate the current dispute but highlight the pressure to optimize the portfolio.
The investigation compounds an already difficult regulatory environment for Pernod Ricard. The company is contesting a separate $314 million back-tax demand over allegations it undervalued some Scotch imports by withholding age and composition details. It faces antitrust proceedings and a ban on selling its brands in New Delhi, which accounted for about 5% of its Indian sales. With penalties, the total exposure in that case could exceed $600 million, roughly a fifth of its Indian revenue and three times its local profit.
The new probe adds another layer of uncertainty. The DRI has not issued a show-cause notice or quantified any demand, but the mere existence of the investigation creates contingent liability. Indian customs disputes are often settled retrospectively, years after goods have cleared customs, with interest and potential penalties. The Volkswagen case, involving a $1.4 billion demand over car parts classification, shows how these disputes can drag on through the courts.
Legally, the companies have several paths. They can respond to any show-cause notice, appeal to the Commissioner of Customs (Appeals) within 60 days, and then to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) within three months. Further appeals can go to the High Court and Supreme Court on questions of law. Indicative timelines suggest 6–18 months for the first two stages, and 12–48 months or more for courts.
Under the trade agreement itself, the options are narrower. The pact includes a state-to-state dispute settlement mechanism, but only India and the UK can invoke it—companies and trade associations cannot. The most practical fast track is diplomatic: the International Spirits and Wines Association of India (ISWAI), which represents Diageo, Pernod, and others, has written to the commerce minister urging urgent clarification. The UK government has said it is "working with the government of India to resolve this issue".
How this dispute is resolved will matter far beyond two companies. It will test whether the market-access benefits negotiated in trade deals survive the friction of customs implementation. It will also signal how India treats bulk or intermediate goods under preferential tariffs—a question relevant to other sectors, such as auto parts and electronics, where classification disputes have arisen before.
If the authorities clarify that bulk Scotch qualifies at 75%, it would affirm that the deal's commercial intent prevails and provide certainty for future shipments. If bulk is excluded, either permanently or through a narrow reading of the tariff lines, it could undermine one of the headline concessions of the pact and force companies to rethink their supply chains.
For now, the companies are in a holding pattern. United Spirits says the searches have had no effect on its financial or operational activities so far. Pernod says it is cooperating and providing all requested information. But the clock is ticking. Every month of uncertainty delays investment decisions and complicates planning for the next fiscal year.
The India-UK trade deal was supposed to be a "golden era" for Scotch in India, opening the world's largest whisky market to more affordable exports. Instead, it has become a case study in the gap between diplomatic agreements and border enforcement. For Diageo and Pernod, the cost of that gap is no longer theoretical—it is landing on their balance sheets.
