MARCH 11, 2019

By TIOL Edit Team

INDIA has done well to focus on the need to review two-decade old moratorium on levying customs duty on electronic transmissions (ETs).

In the Draft National e-Commerce Policy (DNe-CP) released last month, the Department of Commerce says: "The current practice of not imposing custom duties on electronic transmissions must be reviewed in the light of the changing digital economy and the increased role that additive manufacturing is expected to take".

ETs are online products such as software, digital books, Music, entertainment films, video games, etc. These are also retailed as physical products.As many as 49 such digital products have been listed by a Research Paper (RP) released last month by United Nations Conference on Trade and Development (UNCTAD).

ETs also include services for digital products.The distinction between products and services is also getting blurred in the cyber space. There is a need to segregate them into products, services and intellectual property for purpose of levy of customs duty on ETs.

Titled 'Growing Trade in Electronic Transmissions: Implications for the South' RP says: "Trade in electronic transmissions is growing faster than physical trade and with the growth of digital technologies like 3D printing and Big Data analytics, it is expected to replace more and more of the physical trade in the coming years".

It adds: "Most of the developing countries are net importers of electronic transmissions with growing imports. In such a scenario, any decision at the multilateral level with respect to moratorium on custom duties on electronic transmissions can have far reaching implications on developing countries' share in global trade and their industrialization efforts".

Developed countries that call shots at World Trade Organisation (WTO) negotiations have ensured continuation of moratorium on levy of customs duty on ETs year after year. The moratorium was agreed at WTO's Geneva Ministerial Conference On 20th May 1998.

The Conference resolved: "we also declare that Members will continue their current practice of not imposing customs duties on electronic transmissions".

The decision to extend the moratorium on import duties on ETs is renewed at successive ministerial conference. The extension is valid up to December 2019.

It is high time India mobilizes developing countries' against loss of revenue they suffer by allowing duty-free imports of ETs.

As put by a Note that India submitted to WTO during November 2018, "the moratorium deprives developing countries & LDCs, which are large recipients of online traded goods or ET and have higher tariff rates bound at the WTO, of huge customs revenue. As online cross border trade is exploding, the loss in revenue is also cascading steeply. Secondly, this loss is augmented by the additional loss of domestic taxes, making digital trade a huge revenue loss making proposition for most developing countries & LDCs".

The Note observed that revenue from value added tax/goods and services tax levied on physical variants of ETs is lost due to online trade. Moreover, Custom-free imports of digital products hinders the growth of infant digital industry in developing countries.

According to the Note, "some estimates show the global size of online markets is many trillions of US dollars. Even if 10% of this is cross border ETs, as broad estimates show, the moratorium is preventing the levy of tariffs on more than a 100 billion US dollars of trade. And mostly in the developing world! In addition, it will result in serious harm to infant digital industry and SMEs in these countries".

Prior to submission of the Note, India and South Africa jointly gave WTO a paper on 'Moratorium on customs duties on electronic transmissions: Need for a re-think.'

The Paper, presented at meeting of WTO General Council on 26 July 2018, pointed out that "While the WTO Ministerial Declaration and subsequent decisions apply the moratorium to electronic transmissions, there is no agreed definition nor common understanding amongst the Membership of what is covered under electronic transmissions".

India & South Africa should forcefully articulate the case for putting an end to moratorium on imposing customs duty on ETs. They should put their case not only at WTO but also at G20 and OECD.

The need for concerted action on this count becomes urgent if we reckon the fact that some countries are working for making moratorium permanent one at WTO. This must not be allowed to happen as it would be a clear case of depriving developing countries of resources urgently needed to achieve sustainable development goals by 2030.

It is here pertinent to mention an observation made on regional trade agreements (RTAs) in WTO's World Trade Report 2018. It says: "one relatively recent but idiosyncratic provision commits the parties to cooperate to make this practice binding within the WTO framework, with a view to considering its incorporation into the RTA"

It continues: "A related provision further specifies that the parties (may) reserve the right to adjust the practice of not imposing customs duties, consistent with any changes to the WTO Ministerial Decision".

India has already taken a lead on taxation of income resulting from digital transactions. The Government introduced the concept of 'significant economic presence' in the 2018 Budget.

DNe-CP rightly says: "It is important to move to the concept of 'significant economic presence' as the basis for determining 'permanent establishment' for the purpose of allocating profits of multinational enterprises between 'resident' and 'source' countries and expanding the scope of 'income deemed to accrue or arise in India' under Section 9(1)(i) of the Income-tax Act, 1961".

What is important on direct taxes is equally important on indirect taxation front in a rapidly developing digital economy.