| Mar-19-2021

Customs Duty on Virtual Imports – Battle between Developed and Developing Nations

With the revolution of Industry 4.0 and the technological advancements, the scope of digital trade is expanding. In trade context, electronic transmissions are generally understood to cover cross-border digital delivery rather than delivery through physical mode. Growing digitalisation is expected to give further boost to trade by electronic transmissions for example, online delivery of music, e-books, films, software and video games. Most of the digital technologies like Big Data analytics, 3D printing (Remote Additive Manufacturing), Robotics, Artificial intelligence, Internet- of-Things, etc. require software to operate, which are increasingly leaving their physical “carriers” when they cross the borders. It is much simpler to download an e-book or music or software from the internet than import these digitisable products in physical form. Read on…

United Nations Conference on Trade and Development (UNCTAD) has published a
research paper in the month of February 2019 on the subject of “Growing trade in electronic transmissions – Implications for the South.” A list of 49 products has been identified by such
research paper which fall under the category of digitalised products, like Photographic films, Cinematographic films, Printed matter, Music, Media, Software and Video games. This report suggests that in the year 2017 approximately 55% of total global imports of digitalised products were made by way of Electronic Transmission. In other words, approximately $139 billion worth of virtual imports made of digitalised products versus $116 billion of physical imports in the year 2017. Further, the report says the total imports of digitisable products in the year 2026 would  be at around half a trillion dollars, i.e., $ 507 billion, if the market will continue to grow at  rate  of 8% (annual average growth rate of the years from 1998 to 2010). If we apply the current ratio of 55: 45 between virtual and physical imports, the market size of virtual imports would be $279 billion in the year 2026. This will further increase because the incremental growth also needs to be applied in case of global imports through Electronic Transmissions.

Customs Duty and its Moratorium

In today’s scenario, physical import of goods attracts customs duty whereas import of same goods through electronic transmission is out of purview of customs duty. Way back in 1998, on the basis of a proposal submitted by the United States of America (USA), WTO members adopted a Declaration on global electronic commerce, which included a two-year moratorium stating that “Members will continue their current practice of not imposing customs duties on electronic transmissions”.

Since 1998, this Moratorium has been renewed every two years. However, because of the difficulties in limiting the scope of electronic transmission, the debate on the Moratorium on custom duties has continued without reaching any consensus.

USA has been the founder of the idea of continuing the existing practice of not imposing custom duties on electronic transmissions.

Today, after two decades of introduction of e-Commerce in WTO, still the debate is on whether moratorium shall continue or to get away from it. This issue was in continuous discussion under various meetings or inter-ministerial meetings of WTO, but consensus could not build till date. Even in latest meeting of General Council of WTO, held on 10th December 2019, the council decided to continue moratorium next Ministerial Conference which was originally scheduled in June 2020 at Nur Sultan – Kazakhstan but it is postponed due to Covid-19. Next meeting is scheduled in June 2021.

However, with rising digitalisation of products and growing trade in electronic transmission, a decision on moratorium has become important, mainly whether the moratorium should be extended or removed. The main reason for continuance of moratorium is, members countries have not yet reached on the consensus that what is Digital content which ultimately fit under the criteria of Digitalised Product. Another issue is in case of intangibles, what is goods versus service.
In the year 2000, the United Nations Conference on Trade and Development (UNCTAD) identified the digitalised products by mentioning the products like cinematograph film, books, pamphlets, maps, newspapers, journals and periodicals, postcards, personal greeting cards, other printed matter, video games, computer software, musical records, tapes and other sound or similar recordings;
and other recorded media. The note on “Fiscal implications of The Customs Moratorium on Electronic Transmissions: The Case of Digitisable Goods” issued by WTO in the year 2016, has defined the term electronic transmissions as ‘on-line’ deliveries of digitisable products, defined as “physical goods which have the potential to be digitalised and subsequently sent across borders digitally”.

Reasoning by Developing Nations for Removal of Moratorium:

• The moratorium on customs duties on Electronic transmissions implies that customs duty is not imposed on products imported in digitalised form, even in case of customs duty applicable on the same product, if it is delivered in the physical form.

• Due to the Moratorium on custom duties on digitalised products through Electronic transmissions, the tariff revenues of developing countries are
  
  
• The estimated loss of tariff revenue at US$ 756 million due to moratorium, of which 92% is lost by the developing countries and only 8% by developed countries. The top five developing nations which face the maximum revenue loss, are Mexico followed by Thailand, Nigeria, India, China.
  
  
• If moratorium gets removed, the tariff revenue of developing countries will get increased rather than said loss. This can be a source of revenue which will continue to grow in the coming years as more and more products are digitised due to digital revolution.
  
  
• United Nations is also a big supporter for removal of moratorium.

The Argument by Developed Nations, in Favour of Continuance of Moratorium:

In contrast, the argument put forward by Developed Nations, is that developing countries’ gain far more through the moratorium than they would give up in the form of customs duties. It is important that revenue implications to be considered in the context of overall economic growth rather than only tariff loss. Analysis shows that the revenue implications of the Moratorium are likely to be small relative to overall government budgets and that its lapse may would have come at the expense of wider gains in the economy.

In this regard, European  Centre for International  Political Economy has published a paper in August 2019 in the name of “The Economic Losses from Ending the WTO Moratorium on Electronic Transmissions”. Similarly, OECD also published a paper called “Electronic transmissions and international trade –  Shedding new light on the Moratorium Debate” in November 2019.

Both the papers summarised the concerns of developed nations. How the developed nations will get impacted if moratorium get removed. Their inputs could be summarised as:

• Ultimate benefit to consumers: There is no logistics cost involved in case of Electronic Transmission. This is having overall positive impact on total cost of trade. By eliminating cost of logistics and promoting digital delivery, likely to have welfare enhancing impacts. Consumers will get certainly benefit of lower price because of not having customs duty and logistic cost.
  
  
• Digitally deliverable services increase domestic value added in exports:Digitalisation, including the ability to deliver and to source digitally, is associated with new export opportunities, including for SMEs. This development (enabled by duty-free access) is essential to the emergence of a vital information and communications technology (ICT) sector, especially for systems development and data hosting services or creative industries in the developing world. Indeed, the use of such services, which tend to be digitally delivered, is associated with higher domestic value added in exports. So brining customs duty on virtual imports would reduce the export competitiveness of developing nations
  
  
• Impact on overall economic output/Investments in developing nations: case if developing countries impose customs duty on electronic transmission, they will see a reduction in GDP because of reduction in output. The gap between tariff revenue and output losses is likely to be much wider. Currently, the developing countries may have lost some of their revenues, but they have also benefited from the lower prices, inclusion and higher levels of overall consumer welfare produced by such advancement.
  
  
• reciprocal by other countries: If few individual countries began to impose tariffs on electronic transmissions, then other WTO Members may begin to consider their own tariffs. Moreover, product range under the scope of ‘electronic transmissions’ can change country by country as per their own interests and sensitivities. The reciprocation scenario would also lead to further negative impact on the investments in developing nations and will invite a trade war between developed and developing nations.
  
  
• other ways to collect revenue: Moratorium on electronic transmissions does not preclude a country from imposing internal taxes on a digital product transmitted electronically, provided that those taxes are imposed in a manner, consistent with its obligations under the WTO agreements. For example, GST or VAT can be imposed.Accordingly it can be said that customs duties on electronic transmissions will lead to higher costs that exceed the potential tariff revenues and put the open nature of the internet at risk.

Concluding Remarks

While business world is waiting of outcome from next meeting which is scheduled in June 2021, but the issue is not so simple.

One side, the autocracy of developed nations and anther side is needs of the developing countries, a revenue foregone by developing nations due to moratorium, which could have been added to Governments kitty in form of Customs duty. Even if WTO decides to remove moratorium and give freedom to member countries to impose the customs duty, existing trade agreements among member countries, need to be re-looked and to be amended.

In addition to the above, there are lot of open questions which required a detailed deliberation by all member countries. Some of them as follows: –

1. What items should be covered under the category of Digitalised Products. In the year 2016, the United Nations categorized 49 items under the heading of Digitalised Product but that is only story of Developing nations. When it come for discussion before developed nations, certainly story will be different.
   
   
2. Whether digital content is goods or service. There has been a stalemate in the WTO on the issue of whether ‘digital content’ should be treated as a goods and its trade be disciplined under the General Agreement on Tariffs and Trade (GATT) or should it be considered as a service and therefore be disciplined under General Agreement on Trade in Services (GATS). USA has been the primary advocate of the position that digital content should be treated as goods and its trade be disciplined under GATT. EU, on the other hand, has advocated for categorizing electronic
   transmissions as services, to be disciplined under services commitments of countries under GATS.
   
   
3. What about Software products. In the case of software, it is not the value of the actual product but rather the licensing fee paid to the developer. As per EU, software shall always be treated as Service. India considers packaged software as a goods whereas licensing and Software as Service (SaaS) products are treated as service. Another aspect is “Intellectual Property Rights”. It is argued that when digital content crosses border, the program itself remains in the possession of the intellectual proprietor but the buyer has the limited license to use the program.
   
   
4. Whether the moratorium is applicable only in respect of carrier or it includes the content as well. Whether custom duties should be applied on the ‘content’ of the transmitted goods or just the ‘carrier”. The debate on the “carrier” or “content” is closely related to the debate on whether the digital content that is not fixed on carrier medium should be classified as a ‘goods’ or a ‘service’.
   
   
5. Presently, the manufacturing through 3-D printing is growing at very fast pace. What will be impact on this industry if moratorium get removed.
   
   
6. How to monitor by respective government if customs duty imposed on electronic transmission.

Lastly, though each country has its sovereign rights to tax. In case of international trade, the mutual benefit of both countries should be taken care in one form or other. In author’s view, WTO should take call by considering the needs of developing nations and relevant contribution by developed nations in the overall development of the developing countries.