India was at loggerheads with the developed nations and China at the World Trade Organization’s (WTO’s) 13th Ministerial Conference (MC-13) in Abu Dhabi earlier this year. India’s resistance to extending the moratorium on tariffs for digital trade was one point of divergence. This stance is counterproductive, and likely to hurt India’s most promising sector.
During MC-2 (1998), a moratorium on tariffs for electronic transmission was introduced, and this has nurtured the burgeoning digital trade sector. To illustrate, when a United States (US) based chip design house transfers files electronically to its large team in India for the next level of design, there are no tariffs applicable. When the Indian team transfers the updated design files to a foundry in Taiwan for manufacturing the chip, Taiwan imposes no tariffs on the Indian company. This enabled the chip design to flow seamlessly across borders without additional costs.
Today, a plethora of services can be delivered digitally, transcending borders. At MC-13, India’s posture was at odds with digital trade stalwarts like the US and the European Union member states. They, for once, were aligned with China in seeking an extension of the moratorium and even suggesting this tariff-free trade in digital services be made permanent. It would not be wrong to say that India was virtually isolated in its opposition among the large digital powers.
India’s opposition to free trade in digital services is not completely new. In 2020, India introduced the “equalisation levy” targeting e-commerce giants like Amazon and Facebook. While this move aimed to ensure fair taxation, it also underscores the complexities of taxing digital transactions across borders.
A stated reason for India’s opposition is that the developed countries and China dominate the export of digital services and the poorer countries are net importers. The stance is puzzling given India is not a net importer of such services. In fact, it is the fourth largest exporter (at $257 billion), and its digital exports grew by 17% last year — faster than Germany’s and even China’s. Opposing the extension of the moratorium on tariffs thus doesn’t seem logical.
With the distinction between goods and services fast diminishing, India sought clarity on what falls within the scope of digital trade and wanted the option to impose tariffs if necessary. It was not comfortable with extending the moratorium without clarity on what constitutes electronic transmission and what does not. Again, this makes sense only if India were a net importer of digital services. On the other hand, its exports have benefited from the rise of trade in digital services. Worrying about whether 3D printing is electronic transmission — something that it raised at the conference — is meaningless.
India also claims that it is losing critical customs revenue and needs to protect domestic players from unfair competition. By exempting electronic transmissions from duties, it foregoes potential revenue. Behind the rhetoric, there is unconvincing data. The worst-case estimate of losses in terms of customs tariffs foregone because of the moratorium is around $1.5 billion, according to South Centre, an intergovernmental organisation of developing countries. This certainly pales before the country’s digital exports which are ~166 times that number. A 2023 paper by OECD Trade and Agriculture Directorate researchers demonstrates that lifting the moratorium was not in anyone’s interest and especially not in the interest of low-income countries. The paper shows that the potential fiscal revenue implications of not lifting the moratorium are on average 1.09% of total customs revenue or 0.2% of total government revenue for lower-middle-income countries like India.
Some reports conjecture that it is a negotiation tactic. Was India using this as a stick to combat the EU’s Carbon Border Adjustment Mechanism (CBAM)? If this is more than just a negotiation tactic, India will need to rethink its position. The developed nations support a permanent moratorium claiming it ensures a predictable environment for digital trade. India is already a significant player in digital services and has the potential to grow further. Protectionist tariffs will not help make its domestic industry competitive. On the other hand, these will reduce incentives for building globally competitive businesses and drive up the cost of digital services for Indian consumers. It will increase friction in the trade of digital services and the diplomatic impact of raising tariff barriers will far outweigh the insignificant increase in revenue from customs duties.
More importantly, this move hobbles India’s attempts to integrate itself into global supply chains. Recently, a global consortium of semiconductor players petitioned the government to not impose tariffs on data transfer. Chip design is a collaborative effort between teams located in different countries, and taxation will lead to inefficiencies in the supply chain. This move is at odds with India’s ambitions to play a key role in the semiconductor supply chain.
At MC-13, India did finally support the extension of the moratorium on customs duties for electronic transmissions for two more years, but with the understanding that it would expire thereafter. It would do well to remember that every tariff decision shapes its economic destiny. The path forward lies in informed policies, data-driven assessments and well-reasoned geopolitics. India’s current stance does not hold up to these tests.
Sridhar Krishna is senior scholar, Takshashila Institution, and Pranay Kotasthane is deputy director, Takshashila Institution. The views expressed are personal
A self-harming stance on digital trade tariffs
19
0
08.05.2024
India was at loggerheads with the developed nations and China at the World Trade Organization’s (WTO’s) 13th Ministerial Conference (MC-13) in Abu Dhabi earlier this year. India’s resistance to extending the moratorium on tariffs for digital trade was one point of divergence. This stance is counterproductive, and likely to hurt India’s most promising sector.
During MC-2 (1998), a moratorium on tariffs for electronic transmission was introduced, and this has nurtured the burgeoning digital trade sector. To illustrate, when a United States (US) based chip design house transfers files electronically to its large team in India for the next level of design, there are no tariffs applicable. When the Indian team transfers the updated design files to a foundry in Taiwan for manufacturing the chip, Taiwan imposes no tariffs on the Indian company. This enabled the chip design to flow seamlessly across borders without additional costs.
Today, a plethora of services can be delivered digitally, transcending borders. At MC-13, India’s posture was at odds with digital trade stalwarts like the US and the European Union member states. They, for once, were aligned with China in seeking an extension of the moratorium and even suggesting this tariff-free trade in digital services be made permanent. It would not be wrong to say that India was virtually isolated in its opposition among the large digital powers.
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