MAY 28, 2019

By Bhargav Mansatta, Joint Partner, Lakshmikumaran & Sridharan

WTO desires tariff liberalization by member countries i.e. progressive reduction of customs duties but there is no legally binding provision in General Agreements on Tariffs & Trade (GATT) or any WTO covered agreement that sets out the targets for tariff reductions. ¹

Another key characteristic of WTO is that it does not prohibit imposition of customs duties and other duties and charges upon importation by its members but provides for a mechanism by which individual members list their agreed tariff commitments and bind tariffs on products. To preserve this tariff liberalization already achieved between members, WTO member countries are not permitted to increase their tariffs beyond this agreed limit.

Schedules of Concession under GATT & Information Technology Agreement

Imposition of customs duty by India on import of several Information and Technology (IT) products has come under challenge before the WTO by EU and Japan as being inconsistent with Article II of GATT 1994. ²

Article II of GATT 1994 is one of the key provisions of the WTO legal system. Article II:1 specifically protects tariff concessions already agreed upon by WTO members in their 'schedules of concession'. Part I of the schedule of concession of each WTO member provides the bound tariff rate for products. Bound tariff is the maximum tariff levels (for ordinary custom duties and other duties and charges) that can be imposed by the member on import of goods. In short, Article II:1 ensures that products on their importation are exempt from ordinary customs duties and other duties and charges in excess of those prescribed in the schedule.

Tariff negotiations and the concessions in the WTO by members during the Uruguay Round of negotiations in 1994 were made based on harmonized system nomenclature (HSN), a World Customs Organization (WCO) system of identifying products based on standardized codes. ³. India's schedule of concession, like most schedules of concession, is structured according to the HSN.

The Information Technology Agreement (ITA-1) was concluded by 29 WTO Members at the Singapore Ministerial Conference in December 1996. India joined ITA-1 on 25th March 1997. ⁴ Paragraph 2(a) of the ITA-1 required the member countries to eliminate 'customs duties' and 'other duties and charges of any kind' on specified HS sub-headings and specified products wherever they are classified in the HS. ⁵As of 1996, the applicable customs duties in India on most of these HS sub-headings covered under the ITA-1 was ranging from 50% to 100%. As per the India's schedule under the ITA-1, the customs duties on all these HS-subheadings were to be reduced to 0% through phased reduction over a period of time. Accordingly, schedule of concession notified under Article II of GATT (of ITA-1 members including India) was modified for HS headings ⁶ and products ⁷ specified in the Agreement. ⁸

Transposition of Schedule of Concessions due to HS amendments (HS updates)

WCO HS codes require periodic updation in light of developments in technology and changes in trade patterns. IT products have witnessed major developments and changes since the conclusion of ITA-1 in 1996. ITA-1 schedule relied on HS of 1996 edition, which was applicable at that time. Subsequently, HS was updated in 2002, 2007, 2012 & 2017 by WCO. ⁹

Schedule of concession of WTO members is required to be transposed into revised HS codes. If the scope of the concession is modified as a result of transposition, consultations and renegotiations shall be entered into by the member concerned in accordance with the procedure prescribed in Article XXVIII of GATT.

All sub-headings and products identified by the EU & Japan in their request for consultation as having breached the bound tariff commitment were not in existence in the HS 1996 edition. They were included by way of updation of HS in 2007. As per the procedure adopted by the General Council for introduction of HS 2007 changes into schedules of concessions, the WTO Secretariat will transpose the schedule of the developing country members that did not prepare their own transposition. ¹⁰ Technical procedure and timeline till 31 December 2011 was prescribed by the General Council for WTO Members that undertake to prepare their own transposition. ¹¹

India did not prepare its schedule of transposition by 31 December 2011. In other words, India did not transpose its existing tariff concession to the HS 2007 on its own. Hence, the revised schedule for India was prepared by the WTO Secretariat as per the prescribed procedure of transposition and circulated to WTO member countries on 12th May 2015. ¹² As per the procedure, three months time was provided to India and other WTO Members for raising objection to India's revised schedule of concession. ¹³ India did not object to the concessions prescribed under the circulated schedule of concessions. ¹⁴ In short, India did not request for modification or withdrawal of concession for these products at the time of this transposition. Accordingly, India's schedule of concession was certified on 5th September 2015 with effect from 12 August 2015 without any further modification. ¹⁵

Considering that transposition of schedule as per HS 2007 may result in modification/withdrawal of concession in some cases and thereby require re-negotiation and consultation with other members in accordance with Article XXVIII of GATT 1994, ¹⁶ application of Article II of GATT was suspended for some WTO members. However, India was not included in this General Council Waiver Decision, which suspended the application of Article II of GATT 1994 for the WTO members included therein. ¹⁷ Currently eight members including the EU are covered by this waiver decision. ¹⁸ Individual WTO member country can request for inclusion in the waiver decision. ¹⁹ India is listed in the General Council Waiver Decisions for the schedule of concession introducing HS 2012 changes and HS 2017 changes. These waiver decisions was adopted on annual basis and currently suspend the application of Article II until 31 December 2019. ²⁰

Illustration of amendments/revision adopted by HS Code 2007

HS heading 8486 ²¹ was not in existence in 1996 HS and therefore there were no bound tariff prescribed under ITA-1 in 1996. In 2007 HS, new heading 8486 was inserted in HS 2007, which in-turn contained six sub-headings i.e 8486 10, 8486 20, 8486 30, 8586 40 & 8486 90. ²² The revised schedule of concession, prepared by the Secretariat and circulated to member countries on 12th May 2015 transposing HS 2007 changes to the India's schedule of concession, prescribed 0% bound tariff for all sub-headings under 8486. India did not raise objection to this transposition and this acquiescence by India resulted in certification of schedule of concession on 5th September 2015.

In some other cases, the sub-headings were substantially revised by the HS 2007 and the bound tariff of 0% was transposed to such revised sub-headings as well. For example, all sub-headings under HS Code 8517 were covered by ITA-1 and accordingly customs duties were required to be phased out for products covered under HS code 8517 by March 2005. ²³

HS Code 8517 contained following sub-headings as per HS 1996: ²⁴

In 2007, heading 8517 was revised. It contained following sub-headings as per HS 8517:

New age information and technology products were specifically identified vide these sub-headings under HS code 8517. For example, HS Code 8517 12 included mobile phones i.e. telephones for cellular network or other wireless network. In the certified schedule of concession dated 12 August 2015, bound tariff at 0% was notified for all sub-headings under HS code 8517 except one tariff item (eight digit level) under HS sub-heading 8517 69.

Background leading to the EU and Japan complaint against India

Elimination of customs duties led to increase in cheap imports of IT products. For example, total import volume of mobile phones was 59.8 million units in 2008-09, which increased to 209 million units in 2014-15. ²⁵ Apparently, this increase in imports was at the expense of domestic manufacturers of these products. ²⁶ India expressed its dissatisfaction with the ITA-1 and noted that India's experience with the ITA-1 has been most discouraging because it almost wiped out the IT industry from India. ²⁷ India is not participating in the ITA-1 expansion Agreement negotiations, which intends to cover further IT products for exemption from customs duties. ²⁸ To arrest this trend of increase in imports and to protect domestic industry of IT product, Government of India in 2014 decided to increase customs duties on several IT products, especially new age IT products. ²⁹

EU and Japan have alleged that India has applied duties in excess of bound rates in its schedule of concession on import of several IT products. ³⁰ The EU has identified 24 HS sub-headings (2007 edition) for which India is currently imposing customs duty in excess of the bound tariff prescribed in its schedule of concession under Article II. ³¹ Bound tariff i.e. maximum ad-valorem rate of customs duty on these 24 HS sub-headings in the India's schedule of concession (Part I of Schedule XII) is 0%. However, customs duties ranging from 7.5% to 20% is currently applicable on the import of these identified HS-subheadings.

Since waiver for implementation of Article II is currently applicable for HS 2012 and HS 2017 transposition schedules, the EU complaint relies on HS 2007 Edition for identifying HS sub-headings for which India has exceeded bound tariff level. ³² As already noted, bound tariff level for these sub-headings were fixed at 0% when the revised schedule transposing the concession was certified to the WTO with effect from 12 August 2015.

Conclusion - WTO consistency of increase in customs duty

Paragraph 2 of the IT Agreement provides that for the identified HS sub-headings and products covered therein, each party shall bind and eliminate customs duties and other duties and charges of any kind, within the meaning of Article II:1(b) of the General Agreement on Tariffs and Trade 1994. Thus, ITA-1 schedule is notified and implemented under Article II of GATT. This schedule of concession, as already explained, is updated to transpose and reflect latest HS code edition. This tariff schedule, as modified from time to time, is an integral part of the GATT 1994 pursuant to Article II:7. ³³ Consequently, they are part of 'covered agreement' under the WTO. ³⁴

Thus, when India agreed to 0% bound tariff in its schedule of concession for these sub-headings, it gave up its fiscal and economic flexibility to increase customs duty on imports of products classified under these sub-headings. Article II of GATT does not permit India to raise the customs duty on these products above 0%.

However, contrary to this scheduled commitment, customs duty on mobile phones classified under HS sub-heading 8517 12 was at first increased to 10% vide Customs Notification 56/2017 dated 30th June 2017, to 15% vide Customs Notification 91/2017 dated 14th December 2017 thereafter and eventually to 20% vide Finance Act 2018.

India, in its defense, apparently maintains that the IT goods in question do not fall under the IT Agreement. IT and telecom technologies have evolved with new applications and equipment, which were neither existent nor even conceived at the time of signing the ITA-1-I in December 1996. ³⁵ The issue raised by India is important but is not a valid legal defense.

India is effectively contending that it was not required to provide 0% bound tariff for these products in the schedule of concession notified in Article II. However, the relevant legal issue before the WTO Panel, if and when established, would not be whether India's schedule of concession should have provided bound tariff of 0% for these HS-sub headings. Rather, the issue before the Panel would be whether having notified bound tariff of 0% in the schedule of concession for specific HS sub-headings as it did, can India claim that new age information and technology products classified under these HS sub-headings should not be subject to these bound tariff commitments under the schedule of concession. Thus, the defense put forth by India fails to establish that increase in customs duty on specific IT products is not inconsistent with its WTO obligations.

(The author is Joint Partner, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal.)

¹Preamble, GATT 1994.

² Request for consultation by the European Union, WT/DS/582, 2 April 2019; Request for consultation by Japan, WT/DS/584, 14 May 2019.

³ HS is the reference to the system of World Customs Organization for identifying products. Categories of products are identified and subdivided by adding digits. HS codes are uniform for all WTO members up to six digits.

⁴India & World Trade Organisation - other issues - Information Technology Agreement, available at https://commerce.gov.in/PageContent.aspx?Id=64. There are currently 82 participants, representing about 97 per cent of world trade in IT products.

⁵ Ministerial Declaration on Trade in Information Technology Products, WT/MIN (96)/16, Singapore, 13 December 1996.

⁶ Attachment A of the IT Agreement provided list of the HS headings or parts thereof to be covered.

⁷ Attachment B of the IT Agreement lists specific products to be covered by an ITA-1 wherever they are classified in the HS.

⁸ Schedule XII, Modifications, WT/Let/181, 2 nd July 1997.

⁹Each update of HS came into force from 1 st January of that year. For example, HS 2002 came into force on 1 st January 2002.

¹⁰Procedure for the Introduction of Harmonized System 2007 Changes to Schedule of Concession using the Consolidated Tariff Schedules (CTS) Database, WT/L/673, 18 December 2006 r/w amendment to the procedures leading to the Certification of HS 2007 changes, WT/L/830, 5 December 2011; GATT Committee on Tariff Concessions developed procedure for this purpose on 12 July 1983 for the first time, GATT BISD 30S/17.

¹¹ for the Introduction of Harmonized System 2007 Changes to Schedule of Concession using the Consolidated Tariff Schedules (CTS) Database, WT/L/673, 18 December 2006 (r/w amendment to the procedures leading to the Certification of HS 2007 changes, WT/L/830, 5 December 2011), para. 7 r/w Annex 2 - Technical note on transposition procedure Procedure.

¹² Committee on Market Access, Rectification and Modification of Schedules, Communication from the Secretariat, Schedule XII-India, G/MA/TAR/RS/409, 12 May 2015.

¹³Ibid.

¹⁴ Certification of Modification and Rectification to Schedule XII - India, WT/Let/1072, 9 September 2015

¹⁵Ibid.

¹⁶ Preamble, Introduction of Harmonized System 2007 Changes into WTO Schedules of Tariff Concessions, WT/L/675, 19 December 2006. Article XXVIII of GATT provides for procedure of modification and withdrawal of concession under the schedule. India was required to take recourse to this procedure while notifying its schedule of concession to the WTO under Article II. Paragraph 4 of the Understanding on the Interpretation of Article XXVIII of the GATT 1994 specifically provides for withdrawal or modification of concession on 'new products'.

¹⁷ Introduction of Harmonized System 2007 Changes into WTO Schedules of Tariff Concessions, WT/L/675, 19 December 2006, para (a). This waiver decision was adopted on an annual basis until 31 December 2019, WT/L/1049.

¹⁸ Introduction of Harmonized System 2007 Changes into WTO Schedules of Tariff Concessions, WT/L/1049, 13 December 2018, Annex.

¹⁹ Introduction of Harmonized System 2007 Changes into WTO Schedules of Tariff Concessions, WT/L/1049, 13 December 2018, para (b).

²⁰ Introduction of Harmonized System 2012 Changes into WTO Schedules of Tariff Concessions, WT/L/675, 12 December 2018, para (a), WT/L/1050; I ntroduction of Harmonized System 2017 Changes into WTO Schedules of Tariff Concessions, WT/L/675, 19 December 2006, para (a), WT/L/1051.

²¹ HS Code 8486: Machines and apparatus of a kind used solely or principally for the manufacture of semiconductor boules or wafers, semiconductor devices, electronic integrated circuits or flat panel displays.

²² Amendments to the Harmonized System Nomenclature effective from 1 January 2007, pg. 74.

²³ Accordingly, customs duty on products falling under HS code 8517 was reduced to 0% vide Customs Notification 24/2005 dated 1 st March 2005.

²⁴This HS Code remained unchanged even in the HS 2002 edition.

²⁵DGFT import data for HS sub-heading 8517 12-Telephones for cellular networks or for other wireless networks.

²⁶Arun Jaitley imposes tax on imports of telecom, IT products, available at https://economictimes.indiatimes.com/news/economy/foreign-trade/budget-2014-arun-jaitley-imposes-tax-on-imports-of-telecom-it-products/articleshow/38142769.cms?from=mdr.

²⁷ India & World Trade Organization (WTO) - Other Issues - Information Technology Agreement, Other Issues - Information Technology Agreement, Ministry of Commerce & Industry, Department of Commerce, August 2015, available at https://commerce.gov.in/PageContent.aspx?Id=64.

²⁸Ibid.

²⁹India - Tariff Treatment on Certain Goods , Request for Consultation by Japan, DS584, 14 May 2019, para. 2; Also see Arun Jaitley imposes tax on imports of telecom, IT products, available at https://economictimes.indiatimes.com/news/economy/foreign-trade/budget-2014-arun-jaitley-imposes-tax-on-imports-of-telecom-it-products/articleshow/38142769.cms?from=mdr.

³⁰ Request for consultation by the European Union, WT/DS/582, 2 April 2019; Request for consultation by Japan, WT/DS/584, 14 May 2019.

³¹Japan has identified 4 product types in its request for consultation namely, (i) Telephones for Cellular network or other wireless network (ii) Base stations (iii) Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus (iv) Parts of telephone sets and other apparatus for the transmission or reception of voice, images or other data.

³²Introduction of Harmonized System 2012 Changes into WTO schedule of tariff concession, General Council, Waiver Decision of 7 December 2016, WT/L/998, 12 December 2016

³³Article II:7 of GATT provides that the schedules annexed to this Agreement are hereby made an integral part of this Agreement.

³⁴Appendix 1 of the WTO Dispute Settlement Understanding (DSU) provides list of Agreements to which DSU applies. These Agreements are called covered agreements.

³⁵ EU moves WTO against India's import duties on tech products, 10 Apr 2019, available at https://www.livemint.com/politics/policy/eu-moves-wto-against-india-s-import-duties-on-tech-products-1554901887661.html