Karnika Seth, Attorney at law & Partner SETH ASSOCIATES A DVOCATES AND LEGAL CONSULTANTS

1. Trade facilitation –Surmounting the DeadlockErudition ‘ 06, 11th Annual Convention, Department of commerce, Delhi School of Economics,28 October 2006, PHD Chambers of Commerce & Industry, New Delhi Karnika Seth, Attorney at law & Partner SETH ASSOCIATES ADVOCATES AND LEGAL CONSULTANTS

2. Introduction • Trade facilitation (TF) aims to make trade procedures as efficient as possible through the simplification and harmonization of documentation, procedures and information flows • Includes several inter-related factors such as customs and border agencies, transport infrastructure services and IT (as it relates to better logistics), regulatory environment, product standards, tariff rates etc. • Easier movement of goods and services has several benefits • Reduced costs for businesses • Increased predictability and transparency • Better revenue collection, and improved security and control by governments

3. Introduction (contd.) • Systematic rationalization of procedures and documentation for international trade (UN ECE definition). • In WTO context, it means issues covered under GATT Articles V, VIII and X. • Would essentially cover subjects relating to importation and exportation: fees and charges; formalities; documentation; publication of laws; judicial and administrative tribunal; transit.

4. GATT Article V • GATT Article V deals with freedom of transit of goods. • The term “traffic in transit” implies movement of goods and means of transport (other than aircraft) across the territory of the country, where both the starting and the terminating point of the journey lies beyond it. • There should be freedom of transit via the routes most convenient for international transit.

5. GATT Article V (contd.) • No distinction shall be made on the basis of flag of vessels, the place of origin, departure, entry, exit or destination, ownership of goodsor means of transport. • The charges imposed on traffic in transit shall be reasonable and will be on MFN basis.

6. GATT Article VIII • GATT Article VIII deals with fees and formalities connected with importation and exportation. Its important elements are: • All fees and charges (other than import and export duties) imposed in connection with importation and exportation shall be limited to the approximate cost of services rendered. It should not represent an indirect protection to domestic products or a taxation of imports or exports. • The number and diversity of fees for above purposes should be reduced.

7. GATT Article VIII (contd.) • There is a need to minimize the incidence and complexity of import/export formalities and to decrease and simplify import/export documentation requirements. • Substantial penalties should not be imposed for minor breaches of customs regulations or procedural requirements • The provision of this Article shall extend to fees, charges, formalities and requirements imposed by government authorities in connection with importation and exportation. • Illustrative list of areas where this would be applicable: consular transactions, such as consular invoices and certificates; quantitative restrictions; licensing; exchange control; statistical services; documents, documentation and certification; analysis and inspection; quarantine, sanitation and fumigation.

8. GATT Article X • GATT Article X deals with publication and administration of trade regulations. It lays down: • Various laws, regulations, judicial decisions and administrative rulings relating to various customs related issues for clearance of goods (classification or valuation; rates of duties; requirements, restrictions or prohibitions on imports/exports) shall be published promptly by the contracting parties to enable governments and traders to become acquainted with them.

9. GATT Article X (contd.) • No increase in rate of duty or a more burdensome requirement, restriction or prohibition on imports shall be enforced before such measure has been officially published. • Each contracting party shall administer the laws of the above kind in a uniform, impartial and reasonable manner

10. GATT Article X (contd.) • The contracting parties shall maintain judicial, arbitral or administrative tribunals for prompt review and correction of administrative action relating to customs matters. • Such tribunals shall be independent of the agencies entrusted with administrative enforcement

11. Barriers to Trade Facilitation • excessive data /documentation requirements • Red-tapism • High release and clearance times • Antiquated customs techniques and inefficiencies leading to high logistics costs • Absence of co-ordination between customs and other agencies • Inadequate transit regimes • Corruption • Regulatory/administrative barriers in establishing and operating new businesses • Port congestion • Scarce use of IT • Lack of quick legal redress • Unattractive tariff regimes

12. The import timeline… Only 25% of time taken to import (in days) is consumed in transportation Source: World Bank Doing Business 2006

13. India International Transaction Location Norm Air Freight Delhi airport Export 2.5 days Less than 12 hrs Import 8 days Less than 12 hrs Containerized Sea Freight Mumbai Ship Waiting Time 3-5 days Less than 6 hrs Export Dwell Time 3-5 days Less than 18 hrs Import Dwell Time 7-14 days Less than 24 hrs Typical Cargo Dwell Time Source:Jayanta Roy “ Towards International Norms for Indirect Taxes and Trade Facilitation in India” Background paper prepared for the Task Force on Indirect Taxes, Government of India, October 2002

14. Trade Facilitation-GATT-Important Proposals Made 94 written contributions made so far- about 60 deal with the first aim • proposals made by countries like EC, US, Canada, Japan, Switzerland, China, Korea, Uganda, Rwanda, Paraguay, Mongolia, Argentina, India etc. Compiled in TN/TF/W/43/Rev.5 Transparency • Publication of all border related laws, regulations, procedures and practices (Gazettes, Internet) • Time interval between publication of rules and entry into force • Prior consultation and commenting on new and amended rules • Information on policy objectives • Enquiry point • Advance Ruling • Right of appeal/Release of goods in event of appeal • Maintenance of integrity amongst officials

15. Important Proposals Made (Contd.) Simplification of fees • fees be relatable to service provided and not be ad valorem • Publication/Notification of fees/charges • Prohibition on collection of unpublicized fees • Periodic review of fees/charges • Automated payment • Reduction/minimization of the number and diversity of fees and charges

16. Important Proposals Made (Contd.) Simplification of procedures and documentation • Risk management • Post clearance audit • Single Window/one time submission • Border agency coordination • Authorized trader system • Automation of customs • Acceptance of commercially available information and copies of documents • Use of international standards • Pre arrival clearance • Expedited procedures for express shipments • Separating Release from Clearance Procedures • Periodic Review of Formalities and Requirements

17. Important Proposals Made (Contd.) • Establishment and publication of average release and clearance times • Abolition of pre-shipment inspection, consular invoices and compulsory use of brokers • Objective criteria for tariff classification Publication of fees and charges and prohibition of unpublished ones • Periodic review of fees and charges

18. Important Proposals Made (Contd.) Transit formalities and documentation requirements • Give choice of route to operators • Reduction/Simplification of procedures • Harmonization/Standardization • Promotion of regional transit arrangement • Simplified and preferential clearance for certain goods

19. Important Proposals Made (Contd.) • Whether transit of oil and gas through pipeline and electricity through grid could come under Article V (in addition to air, road, rail and boat) • Non-discrimination between individual carriers and types of consignments for transit procedures • Movement of goods from one part of a country to another through a foreign country be recognised as movement in transit

20. Proposals made by India GATT Art. VIII • Members of a Customs Union (CU) should adopt the same border procedures- this should include adoption of same standards, including specifications, terminologies, and definitions, inspection, sampling, and test methods, for border clearance of agriculture and food products • Testing methods should be based on specific product features and its physical state at the point of consumption, such as ‘fresh’, ‘dehydrated’, or ‘otherwise processed’.

21. Proposals made by India • All forms and documentation requirements relating to import clearance should be uniform for all members of a CU • In case of rejection of a consignment to meet certain standards, an option would be first given to return the rejected good to the exporter and only upon failure to exercise this option within a reasonable period of time, any other course of action, including destruction of goods could be considered • Norms of authorised trader system shall be applied uniformly across a CU

22. Proposals made by India • To the extent possible, a harmonised risk management system would be adopted across the entire CU GATT Article X • Import alert/rapid alert be imposed all across a CU only if all members apply uniform standards • Rapid alert be lifted if [x] successive consignments imported from a country/exporter fulfill the prescribed standard • The speed and standard of publicity of denotification of such alert shall be of same level as its issuance

23. Proposals made by India • When goods are detained for inspection by customs or any other authority, there should be a mechanism to inform the importer regarding such detention-either by issuing detention memo or through an on-line system • Each member should allow importer or exporter a right of a second confirmatory test of a sample where the first test result has given an adverse finding

24. Technical Assistance/Capacity Building-India's recommendation • Identify important areas where a large number of developing countries require TA • Prepare an inventory of current TA work being done by donors in these identified areas-ascertain willingness of donors to extend TA-put up the information on specially created WTO website • Attempt a coordinated approach to achieve coherence

25. Indian Economy – An Overview • Economic Performance • Sustained economic growth • Average last 10 years 6.5% • 2004-05 6.9% • Forecast up to 2006-07 >7.0% • Forecast till 2050 – Goldman Sachs 5 % p.a. • Services share in GDP over 50% (52.4% share in GDP in 2004-05) • Manufacturing sector grew at 8.8% in 2004-05 (17.4% share in GDP in 2004-05) • Foreign Trade • Merchandise exports grew by 25% in 2004-05, now US$80 billion • Imports grew by 36%, now US$106 billion • Investment • Foreign Investment – over US$14 billion in 2004-05 (FDI US$5.5 billion, FII US$8.9 billion) • Mature Capital Markets • NSE third largest, BSE fifth largest in terms of number of trades • A well developed banking system

26. Economic Reforms- Fiscal • Rationalization of tax structure – both direct and indirect • Progressive reduction in peak rates • Peak Customs duty reduced to 15% • Corporate Tax reduced to 30% • Customs duties to be aligned with ASEAN levels • Value Added Tax introduced from 1st April 2005- • Fiscal Responsibility & Budget Management Act, 2003 • Revenue deficit to be brought to zero by 2008

27. Economic Reforms: Liberalisation of Investment & Trade Policies • Industrial Licensing • Progressive movement towards delicensing and deregulation • Licensing limited to only 5 sectors (security, public health & safety considerations) • Foreign Investment • Progressive opening of economy to FDI • Portfolio investment regime liberalised • Liberal policy on technology collaboration • Trade Policy • Most items on Open General License, Quantitative Restrictions lifted • Foreign Trade Policy seeks to double India’s share in global merchandise trade in 5 years

28. Trade Policies in India • Exim Policies • Streamlined trade procedures • Liberalised import regime • Thrust on export orientation • Medium Term Export Strategy, 2002 • 1% share in global exports by 2007 • Foreign Trade Policy 2004-2009 • To double India’s share in global merchandise trade by 2009

29. International Trade and India India’s share in global merchandise exports: 0.8% (2003)

30. India’s Export Performance Source: DGCIS, MOC&I

31. Foreign Trade Policy 2004-2009 • Simplifying procedures and bringing down transaction costs • Transaction costs are incurred at the pre and post-production stages, and arise out from several procedural complexities associated with administrative processes, availability of finance and transportation problems. • For enhancing the growth of exports it is important to reduce the transaction costs involved. • Exim Bank Study on Transaction Costs of Indian Exports

32. Sector No. of Firms Transaction costs as % of export revenue (2003 Survey) Transaction costs as % of export revenue (1998 Survey) Textile/Garments 23 3-10 15 Engineering goods 18 < 5 10 Pharmaceuticals 9  8 10 Chemicals 7 < 5 14 Computer software 9 1-5 10 Agro-Industries 2 1-2 7-8.5 Electronic & Electrical machinery 3 5 - Plastic components 2 5-10 - Paper Industry 2 5-7 - Others 7 1-2 Findings of Exim Bank’s Study

33. India’s Import PerformanceSource: DGCIS, MOC&I

34. Potential for Increased exports Exim Bank Study “Strategy for Quantum Jump in Exports: Focus on Africa, Latin America and China” • India could aim to achieve: • US$ 18 billion in Africa’s Imports by 2007 from US$ 3.8 bn in 2003-04 • US$ 4 bn in China’s imports by 2007 (in 64 identified groups) from US$ 0.86 bn in 2000 • US$ 1.8 bn in LAC’s imports by 2007 (in 100 identified groups) from US$ 0.6 bn in 2000 • Share in India’s Exports in 2003-04: Africa (6%); Latin America (1.8%); China (4.7)

35. Advantages • IT –ITES Industry • Exports US$17.2 billion in 2004-05, growth of 34% over previous year • 2008 exports target : US$60 billion, to be 35% of India’s total exports • High quality standards • 76 SEI/CMM level 5 companies, two third of world’s total, are Indian • Over 250 of the Fortune 500 companies are clients of Indian firms • R&D base of over 100 FORTUNE 500 companies • Investment Opportunities • Collaborative ICT research • Joint Software development in a variety of applications Source: NASSCOM

36. Evolution of FDI Policy More sectors opened ; Equity caps raised in many other sectors Procedures simplified Up to 100% under Automatic Route in all sectors except a small negative list 2000 Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors 1997 FDI up to 51% allowed under the Automatic route in 35 Priority sectors 1991 Allowed selectively up to 40% FDI Policy Liberalization

37. Factors facilitating FDI • Availability of skilled manpower • Politically stable economy • Strong macroeconomic fundamentals • Effective legal and regulatory system • Flexible labor laws • Trade Facilitation • businesses rank customs procedures as most important impediment to trade, followed by administrative regulations, and then tariffs • Simple and predictable customs procedures • Sound infrastructure network • Reliable Logistics • Ability to maintain reliable, low-cost flow of raw materials and components • An effective distribution system • efficient transport and logistic services are crucial for export competitiveness and FDI- Increased private-public sector collaboration

38. Recent changes in FDI Policy • FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements: • a. Internet service providers with gateways; • b. Radio paging; and • c. End-to-end bandwidth • Proposals with FDI beyond 49% shall require prior Government approval. • FDI up to 49% from all sources is permitted in the banking sector on the automatic route subject to conformity with guidelines issued by RBI from time to time.

39. Recent changes in FDI Policy • FDI up to 100% is permitted on the automatic route for Mass Rapid Transport Systems in all metropolitan cities, including associated commercial development of real estate. • NRI investment in foreign exchange is made fully repatriable whereas investments made in Indian rupees through rupee accounts shall remain non-repatriable.

40. Recent changes in FDI Policy • FDI up to 100% is permitted for development of integrated townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems; and manufacture of building materials. Development of land and providing allied infrastructure will form an integral part of township’s development, for which necessary guidelines/norms relating to minimum capitalisation, minimum land area, etc., will be notified separately by the Government. FDI in this sector would be permissible with prior Government approval. • FDI up to 100% is permitted on the automatic route in hotel and tourism sector.

41. Recent changes in FDI Policy • FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve useof recombinant DNA technology and specific cell / tissue targeted formulations. FDIp roposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology and specific cell / tissue targeted formulationswill require prior Government approval. • FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the Government.

42. Economic Reforms: Exchange Control & Taxation Exchange Control • All investments are on repatriation basis • Original investment, profits and dividend can be freely repatriated • Foreign investor can acquire immovable property incidental to or required for their activity • Rupee made fully convertible on current account • Taxation • Companies incorporated in India treated as Indian companies for taxation • Convention on Avoidance of Double Taxation with 65 countries

43. Manufacturing competitiveness • Second most attractive destination for manufacturing • ATKearney’s FDI Confidence Index 2004 • Indian industry globally competitive in a wide range of manufacturing skill-intensive products: • Apparels, electrical and electronics components; speciality chemicals; pharmaceuticals; etc. • Automotive components: Major MNC’s & their OEMs sourcing high-quality components from India • Volvo, GM, GE, Chrysler, Ford, Toyota, Unilever, Cliariant, Cummins, Delphi • Indian companies now having manufacturing presence in many countries • Over 55% of approved outward investment by India companies in manufacturing activities

44. India: FDI Outlook • 2nd most attractive investment destination among the Transnational Corporations (TNCs) - UNCTAD’s World Investment Report, 2005 • 3rd most attractive investment destination – AT Kearney Business Confidence Index, 2004 • Up from 6th most attractive destination in 2003 and 15th in 2002 • 2nd Most attractive destination for manufacturing • Among the top 3 investment ‘hot spots’ for the next 4 years • UNCTAD & Corporate Location – April 2004 • Most preferred destination for services - AT Kearney’s 2005 Global Services Location Index (previously Offshore Location Attractiveness Index) • Draft Approach Paper to the Eleventh Five Year Plan (2007-08 to 2011-12) suggests that the economy can grow between 8 and 9 per cent per year

45. Trade agreements • Asia Pacific Trade Agreement (APTA) • Trade Agreement with Japan, China, Korea, Pakistan, Bangladesh, Maldives, Bhutan, Mongolia etc. • Comprehensive Economic Cooperation Agreement (CECA) with Singapore. • Framework Agreement with The Member States of the Cooperation council for the Arab States of the Gulf (GCC). • Framework Agreement with ASEAN, Thailand & Chile. • PTA with Afghanistan, Chile , Mercosur. • FTA with Sri Lanka.

46. India & EU Trade Relations • EU is India's largest trading partner, with two-way trade touching about 40 billion Euros last year and growing by 20 per cent . • In September 2005 it was decided to launch a High Level Trade Group (HLTG) to explore ways and means to deepen and widen the bilateral trade and investment relationship. • India and the European Union on 13th Oct 2006 agreed to begin negotiations on a Trade and Investment Agreement to lower tariff barriers and make investment flows easier. • The proposed agreement involved huge cuts in import duties and would cover 90 per cent of tariff lines over a period of time

47. India & EU Trade Relations • The agreement will cover trade in goods, services, investment, trade facilitation .etc. • It would open prospects for Indian agricultural exports to Europe, besides textiles, leather, gems and jewellery, chemicals and steel. • Transparency in laws and recognition of degrees will also be incorporated in the agreement . • The HLTG had suggested that the agreement be completed in a year but this time-frame looked like a "hard call". The outer limit for concluding the pact is two years.

48. Recent Infrastructure Initiatives • National Highway Development Programme to develop over 24,000 km of highways • Golden Quadrilateral • NSEW Corridor • Links to ports and State capitals • Modernisation of airports • Metro and other airports • Development of ports with private sector • The Electricity Act, 2003 provides the framework for development of power sector • ‘Bharat Nirman’ Programme to develop rural infrastructure at an estimated cost of Rs. 1,74,000 crore (~US$40 billion) • Jawhar Lal Nehru Urban Renewal Mission –Rs. 100,000 crore (US$22 billion) • Country wide rural connectivity programme to link all unconnected village having population of 500 with fair weather road undertaken

49. Roads • Policy • FDI up to 100% is permitted for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels • Ten year tax holiday for road and highway projects • Recent Initiatives • Existing road network of 3.3 million kilometers • 24,000 km of Highways being developed under National Highway Development Programme • Golden Quadrilateral : 5846 kms- 5000 kms completed • NSEW Corridor: 7300 kms – 784 kms completed, 3691 kms under implementation • Investment US$20 billion envisaged • Investment Opportunities • Projects for 12,000 km would be on offer • Many more opportunities in the States

50. Ports • Policy & Incentives • FDI up to 100% permitted for construction and maintenance of ports and harbours. • Ten year tax holiday • Public-private partnership • 12 major ports, 185 minor ports • 14 private/ captive projects with investment of US$ 600 million completed • 24 projects with investment of US$1.6 billion under implementation/award • Investment requirement of US$22 billion to develop maritime sector • Ports & Shipping • Inland waterways