Should India rescind tariffs on IT products after WTO ruling?

The WTO Dispute Settlement Body panel has released its findings in the cases initiated in 2019 alleging violation by India of its commitments under the Information Technology (IT) agreement. The findings were in response to individual complaints filed by the European Union, Japan and Chinese Taipei regarding the “Tariff Treatment on Certain Goods in the Information and Communications Technology Sector.” More specifically, they alleged that India was applying tariffs on imports of certain Information Technology Agreement (ITA) products in excess of the duty limits set out in the WTO Schedule. The complainants argued that India had violated the provisions of its commitments, particularly Articles II:1(a) and II:1(b) of the GATT 1994. These provisions in effect state that products described in the schedule “shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein.”

The three complainants held consultations with India but failed to reach an agreement. Subsequently, a panel was established by the Dispute Settlement Body (DSB) in June 2020. The panel, chaired by an Australian arbitrator, Paul O'Connor, consisted of representatives from Mexico and Chile as the other members.

By way of background, it may be mentioned that most of the WTO agreements are the result of the 1986-1994 Uruguay Round negotiations, signed at the Marrakesh ministerial meeting in April 1994. Negotiations since then have produced additional legal texts such as the ITA. The original ITA was reached in 1996, through the Singapore “Ministerial Declaration on Trade in Information Technology Products”. The ITA covers the whole gamut of IT products. The ITA requires each participant to, within prescribed timelines, eliminate and bind customs duties at zero for all products specified in the agreement. India is a signatory to the ITA.

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The range of products cited by the three complainants fell under Chapters 84 and 85 of the Indian Customs Tariff. They ranged from static converters for automatic data processing machines and units thereof to telecom apparatus, telephones for cellular networks or for other wireless networks, base stations, machines for the reception, conversion and transmission or regeneration of voice, image, or other data, including switching and routing apparatus.

Again, by way of background, it may be mentioned that there is globally a common system of classifying products called the Harmonised System (HS). The HS is updated (transposition) periodically (every four to six years) by the World Customs Organisation (WCO) to keep pace with new technology/products. India’s Customs Tariff also adopts the HS; the WTO Schedule is linked to the HS.

The process of transposition could result in new products being incorporated in the HS Schedule. This is where the dispute has occurred. India’s argument was predicated on the premise that the transposition of the HS 2002 to HS 2007 by the WTO Secretariat had added some items in the zero-tariff category that it felt should not have been. The contention being that a number of products mentioned in the subsequent HS Schedules did not exist when the ITA was signed and hence are not a part of the ITA commitment. Further India contended that pursuant to Article 48 of the Vienna Convention on the Law of Treaties (Vienna Convention), aspects of India’s WTO Schedule are invalid as a consequence of an error during the transposition of the HS 2002 to the 2007 version.

In other words, India argued that the benefit of exemption need not be extended to such new products. Smartphones is a case in point. Hence, India justified the imposition of custom tariffs ranging from 7.5% to 20% on some IT products. The three-member panel, however, was not convinced. It held that the tariff treatment of products under contention were inconsistent with Article II:1(b); that they were “subject to ordinary customs duties in excess of those set forth and provided in India's WTO Schedule”.

India can and will appeal against these findings. There is a certain delicious irony here: The US, which is also a party to the contention raised by the EU, has ensured that the WTO’s appellate body is non-functional. Since 2019, it has blocked appointments and the term of the last member expired in November 2020. So, it is unlikely the matter will be heard anytime soon.

India currently has a duty regime on a large number of IT products which are consistent with its ITA commitment -- a fact acknowledged in the DSB findings. However, there are also a number of IT products on which tariffs are applicable. Despite the ruling, it will be attractive and perhaps expedient to continue with the tariff protection on such products. More so since the appeal would be pending. Our Atmanirbharta doctrine does have more than a hint of protectionism, and it can be argued that it is this (and PLI) which is prompting foreign investments in the sector. Our exports in this sector have performed ‘smartly’ -- smartphones alone worth more than $10 billion are estimated to have been exported in 2022-23.

These findings will reignite the debate over protectionism -- how much, for how long, how compatible it is in the globalised world. There is news about the EU contemplating retaliatory tariffs against Indian exports. The world can ill-afford to descend into trade chaos. In the longer run, it would be prudent and advisable for all to adhere to commitments made under international treaties.

(The writer is a former Chairman, Central Board of Indirect Taxes & Customs)