The government has set up an inter-ministerial panel to examine whether imports of products such as smartphones can be taxed without violating the country’s commitments under the Information Technology Agreement (ITA) 1997 of the World Trade Organization (WTO), official sources told FE. The panel would identify all the items that are within the scope of the ITA, and the ones outside it on which import duties can be imposed without spurring resistance at the WTO.
The move comes as India intends to tax purchases of products like smartphones from overseas to not only promote local value addition but also cut a massive merchandise trade deficit, partly caused by expanding electronics imports. The panel includes senior officials with the ministries of electronics and IT, finance (revenue department) and commerce.
One of the sources said MeiTY has already suggested imposing a 15% basic customs duty on smartphones and some other components. This is aimed at helping domestic manufacturers, as the rollout of the goods and services tax (GST) regime from July will subsume the current countervailing duty (CVD) of 12.5% on certain mobile components such as batteries, wired headsets and speakers. The CVD is currently imposed on imports in lieu of domestic excise duties to offset disadvantage domestic duties impose on local producers who have to compete with imported goods. Entities manufacturing these components inside the country have to pay an excise duty of 1%, which helps them save costs as against paying a CVD of 12.5%.
However, in the new indirect tax regime, CVD would become yet another input tax that can be set off against the GST payable on the value added before the import reaches the consumer. So the tax arbitrage between a high CVD on the imported products and the low actual tax on local production would cease to exist.
Any move to tax items, however, like smartphones, will potentially lead to a dispute at the WTO where countries like the US, Japan and South Korea have already indicated that India is bound by its ITA commitments to allow duty-free imports of such items. Indian officials, however, believe that products like smartphones are not covered by the agreement, as these didn’t enter the market and, therefore, weren’t envisaged when the pact was signed by the country in 1997. It also says that it’s not a signatory to the ITA-II, which was endorsed by some countries in 2015 and serves to substantially widen the product categories to capture latest inventions. The latest exercise to identify products covered by the ITA is just to have a reassurance on the country’s freedom to levy duties on items where it feels the need to promote domestic value addition.
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Some analysts, however, caution that a similar, if not the same, case was brought up by the US against the EU for violating the ITA commitments by taxing certain IT products. The WTO ruled against the EU. However, they said India can still go ahead with the proposed move to tax electronic items. “If the government loses a case at the WTO, it can always withdraw the tax. But if it wins, the course of India’s policy-making on taxing the imports of electronic and IT-related items will change.
Every case is unique, and just because the EU has lost a case doesn’t mean that India will also lose it.” There is a caveat, though. In case India loses the case, he said, there is no fear of retaliation if it complies with the order within a “reasonable time period”. In the worst possible scenario, India may be asked to refund the duties it has collected, and that too, not without strong reasons. India’s electronics imports have jumped in recent years —from $32.4 billion in 2013-14 to $40 billion in 2015-16.
Banikinkar Pattanayak & Rishi Ranjan Kala