Should India push for Customs duty on e-commerce at WTO?

The much-awaited 12th WTO Ministerial Conference (MC12) got postponed due to the outbreak of the Covid-19 pandemic. The pandemic has created major changes in global trade. On the one hand, there is growing protectionism and, on the other, e-commerce is growing rapidly.

The e-commerce market in Asia-Pacific is predicted to grow at a compound annual growth rate of 18.5 per cent from 2019 to 2025. Rise in disposable incomes, growth in internet penetration, and cross-border e-commerce trade have been some of the factors supporting this growth.

When e-commerce was still at a nascent stage, in September 1998, the work programme on e-commerce was adopted by the General Council of the WTO. The programme was largely exploratory in nature, focussing on examining all trade issues relating to global e-commerce, considering the economic, financial and development needs of developing countries.

Under the programme, WTO members agreed to continue the practice of not imposing Customs duties on electronic transmissions. Also known as “moratorium on Customs duties”, this has been renewed regularly at each Ministerial Conference and many WTO members, led by the US wanted, the moratorium to continue in MC 12. With the postponement of MC12, this is likely to continue.

One of the reasons for implementing the moratorium is that it is technically not possible for Customs to collect duties on digitalised products like software.

Change in stance

India’s position has changed over time. India, with a vibrant software industry, was a proponent of liberalisation of Mode 1 or cross-border trade. However, with the growth of e-commerce, there is a fear that developing countries, including India, are importers and thereby losing out on Customs duty. When countries are hard-hit by the pandemic and revenue requirements are rising, can they lose out on the revenue through e-commerce imports?

On March 10, 2020, India and South Africa circulated a paper on the need to understand the scope and impact of the moratorium. Citing UNCTAD studies, it presented the potential tariff revenue losses from goods that have become digitised, and which are digitisable. Based on a limited number of digitised goods, namely, films, printed matter, video games, software and music, the UNCTAD study estimated a loss of tariff revenue of more than $10 billion globally because of the moratorium, 95 per cent of which is borne by developing countries.

The study did not consider that with growing trade agreements, tariffs are reducing. India itself announced Early Harvest with key trading partners like the UK and Australia in March 2022 and relaunched the India-US Trade Policy Forum and, hence, the country is open to tariff reduction.

As an IT/ITeS hub, India’s position is different from other developing countries. The Indian technology-based industry has grown from $191 billion in financial year 2019-20 to $194 billion in FY 2020-21. The sector is a large employer of skilled workforce — employment increased from 300,000 in the FY99 to 4.47 million in FY21. Even during the pandemic, 138,000 new jobs have been created (Nasscom data).

India has become the third largest technology start-up hub in the world with around 12,500 technology start-ups in 2019, and 1,600 new start-ups in 2020. In 2020-21, telecommunications, computer and information services accounted for nearly 50 per cent of India’s services exports, and given the travel ban much of this export was online.

Several studies conducted by ICRIER show that SMEs have benefited by on-boarding e-commerce platforms, and several measures have been taken by the government to support such on-boarding. Even as global investment flows fell during the pandemic, India received one of the highest investments during FY21. During April-September 2020, the total FDI inflow of $39.61 billion was 11.98 per cent higher than in the corresponding year-ago period ($35.37 billion).

The investment level reached a peak in August 2020, at $17 billion, due to investments by global technology giants in the market. Therefore, the Indian technology industry is worried that if India takes a position against moratorium on Customs duty it may adversely impact them.

In India, there is lack of data and information on e-commerce trade and how the moratorium is going to affect domestic companies. While some fear that the moratorium is leading to Customs revenue loss, there is no denial that India is one of the world’s largest exporters of software, films and music and exports of printed matter and games are rising. Hence, India may have benefited from the moratorium and may continue to benefit as e-commerce grows due to the pandemic.

India should take the opportunity of the postponement of the MC12 to set up an institutional mechanism for regular consultation with stakeholders like Nasscom to firm up our position in the WTO.

The writer is Professor, Indian Council for Research on International Economic Relations (ICRIER)

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