Scottish distillers are threatening to set in motion a dispute procedure that could lead to sanctions against India by the World Trade Organisation (WTO) if they are not given fair access to the Indian whisky market - the world's largest.

The Scotch Whisky Association has waged a 20-year battle against India's draconian tariffs on imported spirits. It won a verdict against the country at the WTO last year under which central government taxes were lowered to 150 per cent from 550 per cent, but says that that ruling is now being circumvented by new levies imposed by individual Indian states.

The dispute led to a bitter exchange this week between two of the trade's leading figures.

Paul Walsh, the Diageo chief executive and chairman of the Scotch Whisky Association, gave warning that “the industry will not hesitate to return to the WTO” if states do not drop discriminatory taxes. The WTO could force India to act by imposing sanctions on other areas of trade. The association has written to the European Union to highlight its concerns.

Vijay Mallya, the billionaire head of UB Group, India's largest spirits producer, accused the association of being “paranoid” about India and cautioned that its “heavy handed” approach could jeopardise Scottish distilleries' prospects in the country.

Mr Mallya, who bought Whyte & Mackay for £595million in 2006, controls about 60 per cent of the Indian whisky market.

Just 1 per cent of the estimated 1billion litres of whisky downed in India each year is produced outside the country, as import duties shield “Indian-made foreign liquor” - domestic brands that resemble international products. Their sales are increasing by an estimated 9 per cent a year.

India, already the world's largest consumer of spirits, is also developing a taste for wine, but here, too, foreign producers are being locked out by sky-high tariffs. Only 25 per cent of the wine drunk in India is imported.

The subcontinent is expected to triple its wine consumption in the next three years to about 188,000 hectolitres, according to the trade consultancy International Wine and Spirits Record. The rise is being driven by soaring numbers of foreign residents, tourism, and an increasingly well-heeled domestic middle class.

India's total alcohol market is worth about £7billion a year.

In 2006, the European Union filed a case at the WTO over the regional tariffs imposed in India, which increased duties on wines to as much as 260 per cent and on spirits to 550 per cent. The taxes represented “some of the highest duties for any products anywhere in the world”, it said.

However, Indian officials say that those who feel the pinch - rich consumers - can afford to pay. Westerners flocking to live in cities such as Bombay, India's commercial capital, find the cost of living much lower than at home. Only rents and imported alcohol cost more.

Meanwhile, with the growth of sales of alcoholic drinks expected to remain lacklustre in Western markets, foreign producers continue to eye India as a prime target for sales.

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