India could lose tax revenue of Rs 75,733 crore a year if it now scraps tariff on merchandise imports entirely, to either counter or emulate the US-led Trans-Pacific Partnership (TPP) model of zero duty over a period of time, sources told FE.
The prospect of massive revenue losses has put negotiators for various trade talks in a fix and have made their jobs tougher than ever, amid fears that the TPP model may become the benchmark for future trade deals even among nations outside the mega bloc.
The government may now decide the red line for each trade negotiation, keeping in mind realities of the country that needs huge funds for development work and rues a relatively low tax-GDP ratio.
The estimate was made by the revenue department of the finance ministry at the request of the commerce ministry to help government officials negotiate better, as they seek to balance out interests, often conflicting, of various stakeholders. Such an estimate will also help them gauge how good the other party’s offer is against an Indian commitment. India will participate in the next round of talks for the RCEP from June 12 to 18 in Auckland, New Zealand.
According to the estimate, the potential losses comprise basic customs duties of Rs 64,729 crore, countervailing duties (CVD) of Rs 8,091 crore and special additional duties (SAD) of Rs 2,913 crore, sources told FE.
The potential losses will be even higher in the coming years once import picks up. Currently, the country’s average import tariff rate is around 13.5% and in case of non-agricultural items, it’s even lower, at 10%.
Although the CVD and the SAD are imposed even when the basic customs duty is zero, the estimated losses of these taxes are due to the fact that these are levied (in percentage terms) after the basic customs duty is added to the assessable value of an imported product. So, if the basic customs duty is abolished, the CVD and the SAD also drop to a certain extent. The CVD and the SAD are imposed on imported items under the so-called “national treatment principle” to offset any undue disadvantage to a domestic manufacturer (of the same or similar goods) who has to pay local levies such as excise duties and sales tax. They are levied even in cases where the BCD is zero to avoid undue advantage to imported goods over domestic ones.
The government has budgeted total customs collection of Rs 2,30,000 crore for 2016-17, including basic customs duty of Rs 64,729 crore, CVD of Rs 116,700 crore and SAD of Rs 34,000 crore. The country’s total customs duty collection stood at Rs 2,09,500 crore in 2015-16, representing 1.54% of its nominal GDP.
A former Indian negotiator at the WTO said for a country like India, abolishing the basic customs duty entirely is worth experimentation when commensurate returns are assured. “Ultimately, it’s a political call,” he said.
A former commerce secretary recently said India’s free trade agreement with Asean (in goods) in 2009 was guided more by politics than economics, as it was part of the government’s ‘Look East’ policy.
Domestic industry has been critical of the country’s FTA with Asean members, saying its offer on goods was hardly matched by gains in subsequent deals in services and investments and resulted in massive trade deficit. India has been pushing hard to get a fair deal in services and investments in all the current negotiations, including RCEP, if it is making attractive offers in goods (its average tariff of 13.5% is the highest among potential RCEP members, so its sacrifice level will also be greater than others). But sources had earlier told FE that most others are interested only in seeking a better deal from India in goods, but are not willing to offer much in return in services or investments. This could delay the negotiations until a balanced approach is adhered to by all.
Another source said: “It’s a myth spread by vested interests that India’s tariffs are a barrier to trade. This is evident from the fact that Chinese goods have flooded the Indian market despite these tariffs,” he added.
India’s imports from China stood at a whopping $60.41 billion in 2014-15, accounting for 13.5% of the country’s total imports, according to the official data. The share of China in India’s total merchandise imports grew further in the last fiscal (up to February) to 16.2%, a sharp rise from 11.3% in 2013-14.
What has been vexing Indian negotiators is the tag of being “obstructionists”. “India was blamed for obstructing the WTO’s trade facilitation agreement (TFA) in goods in 2014. Well, it endorsed the TFA in April, but even until now only 81 of the 162 members have ratified it (at least two-thirds of the members must ratify the pact for it to take effect). Why not blame others?” asked the former negotiator at the WTO.
Sources said for a country like India, moderate tariff rates are desirable, as they ensure certain amount of revenue generation along with trade creation. “Studies have pointed
out that beyond a point, tariff reduction doesn’t help create additional trade opportunities; it just helps a few at the cost of the rest of a country upon whom higher burden of taxes falls so that revenue losses due to the abolition of the customs tariff is offset,” source said.