New Delhi: The World Trade Organization (WTO) has ruled that India violated global trading rules by imposing tariffs on some IT products. A government source told Reuters that India is planning to appeal against the ruling.
The WTO panel gave its ruling related to a 2019 dispute with the European Union, Japan and Taiwan over import duties on IT products.
“Yes, India will go in to appeal,” a trade ministry source, briefed on the government position, told the news agency.
What is the WTO dispute?
In 2019, the European Union dragged India to the WTO alleging that it had imposed import duties of between 7.5% and 20% on a wide range of IT products, such as mobile phones and components.
It said that New Delhi imposed more tariffs than what it had committed to in its tariff schedule at the WTO.
In the same year, Japan and Taiwan filed similar complaints against India.
In 2018, the US, China, Canada and Norway, among others had raised concerns over the increase in India’s customs duties of up to 20% from 15% on high-end mobile phones and other items, including smart watches.
According to the EU’s complaint, there’s a list of items on which India has levied excess tariffs: laboratory, hygienic and pharmaceutical glassware, machines and apparatus for the manufacture of semiconductor boules or wafers, electronic transformers, telephone sets, particularly cell phones, transmission apparatus for radio or television broadcasting, electronic integrated circuits, oscilloscopes, and measuring or checking instruments, among others, Mint had reported in 2019.
When was the tariff agreement signed?
The international agreement was signed in 1996, in which the members finalised the Ministerial Declaration on Trade in Information Technology Products (ITA), per the The Print. India became a party on March 26, 1997.
As per the agreement, India is required to eliminate tariffs on products such as computers, telecom equipment, semiconductors and scientific instruments.
The core dispute
Before the WTO was established, there were procedures that required the contracting parties to the General Agreement on Tariffs and Trade 1947 (GATT 1947) to incorporate updated nomenclature into their schedules, according to the Print.
The duties member countries of the WTO impose are linked to a common system of classifying items across countries, called the Harmonized System (HS). This system uses code numbers to define products.
The Harmonized System is updated every four to six years by the World Customs Organisation to keep up with new innovations and products.
India’s WTO Schedule – which is a summary of taxes we impose on various goods and services – is linked to this HS.
When the HS is updated, all member countries are provided all the relevant data so they can reconcile the new system with the old.
Using this information, each member country’s schedule is updated to reflect the new HS nomenclature. This process is called ‘transposition’.
Usually, if the transposition results in a change in the scope of the concession on products, the member countries can conduct negotiations with the WTO.
This is exactly where the core dispute has occurred with India.
“A number of products mentioned in this ruling did not exist when the ITA was signed. That is going to be our primary submission in the appeal,” a senior government official told the Indian Express.
For instance, a Mint explainer said that in 1997, smartphones weren’t around and hence, there’s no case to answer.
The bone of contention
The Print reported that in April 1997, India proposed a modification of its WTO Schedule. This proposal was circulated to all the members for review. These changes to India’s Schedule, based on the 1996 edition of the Harmonized System (HS1996), were certified in October 1997.
Then the WTO members agreed to update the Harmonized System in 2002 (HS2002), the report said, citing the order.
“For the transposition to HS2002, additional procedures regarding the transposition process were adopted… but the obligation remained on members to perform the transposition process,”the order said.
Note that the transposition process could be very technical and sometimes tricky.
“In 2006, when the WTO prepared to update the HS2002 to a 2007 edition, it decided that developed countries would do their own transposition, but the WTO Secretariat would do the transposition for developing countries unless they indicated that they would do it themselves,” the report said.
“Since India did not indicate that it intended to undertake the transposition of its Schedule from the HS2002 to the HS2007, the WTO Secretariat undertook to prepare India’s transposition,” the report said, citing the order. “On 8 November 2013, the Secretariat communicated to India via email the draft files for the HS2007 transposition of India’s Schedule.”
The Print reported that it wasn’t clear to which email address the WTO sent its email.
“The draft modifications to the Schedule were circulated on 12 May 2015 and, since no objections were received within three months of circulation [including from India], on 12 August 2015, the changes to the Schedule were certified,” the order added.
However, three years later, on September 25, 2018, India requested the WTO Secretariat to correct “certain errors contained in its HS2007 Schedule”, the Print reported.
Basically, India contended that the transposition of the HS2002 to HS2007 by the WTO Secretariat had added some items in the zero tariff category that it felt shouldn’t have been included.
However, several countries including Canada, China, the European Union, Japan, Taiwan, Switzerland, and the US objected to India’s proposed rectification, the report added.
Interestingly, India has decided to approach WTO’s appellate body, but since it has remained non-functional since 2019 as the US has blocked membership to the body, it might buy India some time. The other option, suggested by the EU, was to use the multi-party interim appeal arbitration arrangement.
Will the ruling affect India’s manufacturing ambitions?
Tarun Pathak, research director at Counterpoint Research, told the New Indian Express the impact of this ruling will not be severe in the near-term but will create a dent in the overall ‘Make in India’ initiative.
“Foreign investors will be treading cautiously in making further investments in India and this may also hamper the speed in getting the FDIs in the ICT space,” he said.
He further said that if the decision on the ruling affects the duty structure in India, it could impact the momentum of local value addition.
In the long-term, the impact could be more severe, experts said.