#TaxmannPPT | Decoding India's Free Trade Agreement with UAE & Australia

Leveraging benefits under recent Free Trade Agreements May 2022

Price Waterhouse & Co LLP

Contents 01

Overview of FTAs

02

Salient aspects of UAE, Australia FTAs, sector coverage and impact

03

How FTA benefits can be obtained process and compliances

04

Learnings from the past - Case studies

05

Areas of concern for businesses

06

Way forward - How businesses should prepare for FTAs

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 2

Free Trade Agreements| Overview What are ‘New Age’ FTAs

What is an FTA

• •

Arrangements between two or more countries or trading blocs to reduce/ eliminate customs tariff and non-tariff barriers To secure concessions in areas where there is no WTO commitment

•

New Age FTAs include matters which are outside the ambit of WTO law and involve deeper trade integration (WTO Plus and WTO Extra matters)

World trade organization and FTA’s

Sustainable Trade

Labour Standards

Trade Remedies

Digital Trade

• WTO’S fundamental principle - MFN-Most Favored Nation treatment • However, as an exception to MFN treatment, lower customs tariffs under FTAs as per Article XXIV of the GATT

• •

FTAs normally cover - Trade in goods, Trade in services and Investments Recently executed FTA with UAE and Australia. India is also in talk to execute FTA with the UK, US, EU, Canada, Israel and Oman which may include matters of New Age FTAs

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

Key FTA benefits

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2

3

4

Predictability and stability

Supply Chain Optimization

Working capital efficiency

Protecting Business

May 2022 3

Free Trade Agreements| India’s perspective on FTAs India’s re-calibrated FTA strategy Increased bilateral trade

Surge in imports was much higher compared to exports

Review and re-negotiation of the existing FTAs • To improve exports and to support domestic industries negatively impacted by FTAs

Impact of existing FTAs

As imports shot up, India’s trade deficit with these countries increased

India’s exports to FTA countries did not outperform overall growth

Emphasis on leveraging complementarities with developed countries • To integrate with global value chain • Ensuring an equal, fair and reciprocal trade terms with partner FTA countries • Obtaining better market access for Indian exporters

Reasons of underutilization of FTAs • India kept lower number of goods in the sensitive or exclusion category • Higher MFN of India, leading to more imports into India • Other key reasons - lack of information on FTAs, poor participation of industry in trade negotiations etc.

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 4

Free Trade Agreements| India-UAE CEPA Key highlights

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Tariff relaxations UAE offered duty elimination on more than 97% of its tariff lines - Substantial Gain For India’s Labor-Intensive Industries

Digital Trade For the first time, India has included a digital trade chapter in the FTA.

Permanent safeguard mechanism To control excessive imports

2

Impact on key sectors Stringent rules of origin Requirement of 40% minimum value addition plus CTSH/ CTH (as against 30%-35% in earlier FTAs)

Pharma

Gems & Jewellery

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6

Government procurement India granted at par treatment to UAE companies for government procurement and vice-versa

Syncing with PLI schemes To align with Make in India agenda.

Labour intensive sector

• Fastrack product registration in UAE within 90 days for products already approved by Australia, Canada, European Union, Japan, USA or UK • Tariff concession of 1% on imports up-to 200 tonnes • Zero duty access for Indian Jewellery in UAE market • Zero duty from day one for various industries such as engineering products, leather and footwear, textiles etc.

• Substantial increase in exports expected in next 5 years

Bilateral trade US$60bn to US$100bn over next five years

Access to African and Middle Eastern Market

Note-India-UAE CEPA signed on 18th February 2022 and in effect from 1st May 2022 Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 5

Free Trade Agreements| India-Australia ECTA Key highlights

1

Tariff relaxations Australia offered duty elimination on 85% of tariff lines (covers 96.4% of Indian exports value)

2

Impact on key sectors • Phased manner tariff elimination over 5 and 7 years

Stringent rules of origin Stricter rules of origin to prevent any routing of products from a third-party.

Pharma and Medical devices

Alcoholic beverages

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5

Double Taxation Australia agreed to resolve the double taxation issue being faced by Indian IT service exporters

Safeguard mechanism To deal with any unusual surge in Imports

4

Reducing non-tariff barriers A separate chapter in ECTA on Technical barriers to trade

6

Trade in Services Australia offered 135 subsectors to India compared to 103 sub-sectors by India.

Labour intensive sector

• Australia agreed to utilize the reports of CDSCO* for a) pre-market evaluation, and quality assessment of manufacturing facilities • Australian wines – reduction 150% to 25% over 10 years in two categories, thus taking care of Indian domestic wine industry • Zero duty from day one for various industries such as engineering products, leather & footwear, furniture etc.

• Substantial increase in exports expected

Bilateral trade expected to grow to US$45–50bn in next five years

Australia looking to make India one of its top three export markets by 2035

Note-India-Australia ECTA signed on 2nd April 2022, however, it is yet to be implemented Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 6

Process to claim benefit | For Importer Process Check your import supply chain: Does India have an FTA with the exporting country or trading partner?

1

2 Determine whether the imported product meets the origin criteria under the FTA

Check whether your product is covered under the FTA (through tariff notification)? – Correct classification is critical to ascertain the benefit

1

Certificate of Origin (CoO) is the most critical and a mandatory document to claim benefit from Indian customs

2

Prepare and retain origin related back-up in the prescribed format – Form I** – for each BoE

3

Importing party to obtain detailed data/ documents in terms of FOB value of export, ex-factory price, CIF value of non-originating raw material, etc. from the exporting party

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4

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

Documentary requirements

Comply with the documentary requirements as well as CAROTAR* requirements *Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020)

* *Form 1 as under CAROTAR rules

May 2022 7

Process for exporting under FTA Process

Documentary requirements

Step 1: CoO application with requisite information before export Indian Producer, manufacturer or exporter* Step 3: Export of goods

Step 2: Grant of CoO post review / verification

Import/ export of eligible items at concessional rates

DGFT/ any other specified authority Step 6: Request for verification of CoO & accuracy of information

Step 4: Furnishing CoO to claim duty exemption at the time of import Overseas Importer

1

Information required for filing an application of CoO – Refer subsequent slide

2

Copy of CoO – to be provided to importer

3

Exporter to substantiate value addition requirement with the help of robust documentation

Step 5: Verification of CoO (request Overseas Customs Authority for additional information)

Source https://coo.dgft.gov.in/ Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 8

Minimum information required for CoO | For Exporter 1

Description of goods to be exported to be provided

2

HS Code at minimum 6-digit level of the products to be exported

3

FOB value of the exported goods at a product level

4

Description of components, materials, inputs, parts, raw materials etc. along with their respective country of origin

5

Supplier’s name and address to be provided for respective inputs/materials

6

Quantity and Unit of goods exported along with per unit and total CIF value

7

Details of total value with split of non-originating materials, labor cost, other overhead costs and profits are required

8

Description of manufacturing process undertaken on raw materials to make the final product

9

Demonstration of value addition norms on originating/ non-originating materials as a percentage of FOB or Ex works price

All values may be indicated in US $ or INR Source – India-UAE CEPA Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

May 2022 9

Learning from the past - Case studies Case Study 1: Impact of India-ASEAN FTA on domestic paper industry •

Tariff elimination in phased manner resulted in substantial increase in imports i.e. reduction from 10% to 0% in 5 yearly equal instalments

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ASEAN countries used this opportunity to push their inventories into India which severely impacted domestic paper mills

400000

Case Study 2: Impact of existing FTAs on domestic steel industry •

India is second highest producer of crude steel. Tariff elimination in phased manner resulted in substantial increase in imports i.e. reduction from 10% to 0% in 5 yearly equal instalments

•

Japan and South Korea posed serious challenges for Indian steel industry due to their large surplus capacities and high exports to production ratio 15000000

300000 200000

343000

Increased to 3,43,000 in 2019-20 from 29,000 tonnes in 2010-11

100000

7585000

10000000 5000000

Increased to 75,85,000 in 2019-20 from 50,13,000 in 2010-11

5013000 29000

0

Imports of paper and paper board 2010-11 (in tonnes)

2019-20 (in tonnes)

Impact on domestic industry Job-losses/ factory-closures/ under-utilization of production capacity in India

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

0 Imports of steel 2010-11 (in Rs)

2019-20 (in Rs)

Impact on domestic industry Steel players severely impacted because of significant reduction in Custom duties and absence of in-built trade remedial provisions

May 2022 10

Learning from the past - Case studies Case Study 4: FTA Benefits on third party invoicing arrangements in international trade

Case Study 3: Incorrect declaration •

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•

•

Singapore

Imported parts attracted concessional duties under India-ASEAN FTA, however, if imported in a semi-knocked down form were subject to BCD at 10%.

2

Bill to

A

Ship to

Authorities initiated investigation on the ground that the Company imported goods in a semi-knocked down condition but mis-declared them as parts for the purpose of availing customs duty benefit under AIFTA.

1 3

B Malaysia

Other allegation by investigation authorities included that Company had artificially increased profit in order to achieve value-addition, as it was otherwise not achieving value-addition of 35% Accordingly, differential Customs duty along with interest and penalty was imposed and personal penalties were levied on senior representatives of the Company

Critical for companies to determine whether the imported product meets the origin criteria under the FTA

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

India

C •

Third country invoicing allowed under some of the recent FTAs such as India ASEAN FTA, India-Malaysia CECA, India Japan CEPA, India-Korea CEPA. Accordingly, the goods can be imported under Third Country Invoicing method provided the goods meet the origin criteria

•

Similar provisions are included in the recent FTAs i.e., India-UAE CEPA and India-Australia ECTA

Third party invoicing is commonly used arrangement and therefore, it is critical to evaluate invoicing methodology along with supply chain

May 2022 11

Areas of concern for businesses

1 • Correct classification of goods – Incorrect classification may lead to denial of FTA benefits and other penalties

2 • Certificate of origin should be proper and complete – Benefit may be denied outrightly in case of incomplete / Expired CoO

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5

• Preserve documentation for substantiating origin of goods and production process

• Alignment of disclosures in import documents vis-à-vis bill of entry

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3 • Inflating profit / cost-elements by the exporter carries risk of penal consequences/ supply chain disruption

6 • Following prescribed norms for consignments other than direct consignments

May 2022 12

Way forward - How businesses should prepare for FTAs Before signing of FTA

Check existing supply chain/market access to identify issues for advocacy

Analyze impact on business over the next few years

Leveraging benefits under recent Free Trade Agreements Price Waterhouse & Co LLP

Post signing of FTA

1

Understanding eligibility and compliance related requirement to claim benefit

2

Laying down a process / SOPs on do’s and don’ts for claiming benefit under FTA

3

Collation of requisite information to claim benefit

4

Need for a technology framework to analyze, prepare, apply for CoO and retain the requisite information

5

Liasoning with overseas customers/ suppliers to claim benefit of preferential rate basis CoO

Active participation in FTA negotiation consultations

Re-align supply chain and other business strategies - to leverage opportunities to claim tariff/non-tariff advantages under FTAs

May 2022 13

Thank you

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