WTO Work Programme on E-Commerce: Strategy for Further Negotiations

Author(s): C. Satapathy
Source: Economic and Political Weekly, Vol. 36, No. 39 (Sep. 29 - Oct. 5, 2001), pp. 3665-
3668
Published by: Economic and Political Weekly
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 WTO Work Programme
are not included in these figures. It may
be mentioned here that Teltscher (2000:
Table 1) records software imports against

on E-Commerce
only three HS codes 852431, 852440 and
852491. It is seen from the DGCI&S data
that software imports against these three
codes are only Rs 489 million, whereas
Strategy for Further Negotiations software imports against HS codes 4911,
852453, and 852499 not listed by Teltscher
is Rs 9,142 million. Other products under
A possible negotiating strategy on e-commerce at the Doha these codes deliberately described as soft-
ware to claim full exemption from cus-
Ministerial for developing countries such as India which, despite
toms duty cannot also be ruled out. Cur-
typical infrastructural weaknesses, have demonstrated a strong
rently Indian customs tariff exempts major
growth potential in e-exports. digitisable products such as books, news-
papers, plans, drawings and designs and
C SATAPATHY considered electronic transmissions as
information technology software includ-
importations for customs duty purposes
ing licences therefor. Digitisable products
allowing a market access proposal and no one imposed customs duties that on are chargeable to customs duty at
from the US in February 1998 to freethem. On the other, it proposed that WTO present include films, audio and video
electronic transmissions from cus- members should agree to continue this tapes and discs, as well as computer and
toms duties, the WTO members took uppractice so that absence of customs duties video games. As such, the impact of a
discussions in the new area of e-com- on electronic transmissions would remain.customs duty moratorium on digitisable
merce for the first time. The Geneva products would have to be considered
The first part of the proposal suggests that
Ministerial Declaration of May 1998 that electronic transmissions are not consi- somewhat differently in the case of India.
followed provided a mandate to the Gen- dered as importations whereas the second Teltscher (2000) has pointed out that
eral Council to establish a work programmepart implies that such transmissions candeveloping countries would be primarily
apart from agreeing to a temporary mora- be considered as importations and there- concerned if physical delivery of goods
torium on imposition of customs dutiesfore on subject to customs duties. is replaced by electronic delivery and tariffs
electronic transmissions. Details of an Customs duties are levied on importa- are not collected. Her conclusion is based
elaborate work programme subsequently tion of goods across a border. Harmonisedon her finding that developing countries
established by the General Council Systemsin Nomenclature (HS) developedaccount for 16 per cent of world imports
September 1998 and some of the general by the World Customs Organisation codi- of digitisable goods whereas their share
fies classification of goods. It covers
concerns from a developing country per- of tariff revenues from these goods is 63
spective were examined in an earlier tangible
ar- per cent. She has also pointed out that
goods with the exception of one
intangible product, namely, 'electrical
ticle (EPW, September 25,1999, pp 2771). India will be one of the main countries
In this article, we examine a possible
energy' (HS code 27.16), use of which isaffected by fiscal losses for three product
optional for HS Contracting Parties.
negotiating strategy at the Doha Ministe- categories, namely, printed matter, soft-
Indian customs tariff lists electrical
rial for developing countries like India ware, audio/video products. Her conclu-
energy under code 27.16 but as a dutysions,
which, despite typical infrastructural weak- free however, do not ring true in the case
item. In the 2002 version of the HS,
nesses, have exhibited a strong growth ofthe
India. Firstly, in the two categories of
potential in e-exports. original idea of including three new printed
codes matter and software, most prod-
for software was ultimately given up ucts
duesuch as books, newspapers and jour-
Goods or Services? to disagreement amongst HS contracting nals, plans, drawings and designs and
information technology software are
parties. There is, thus, a general reluctance
The issue of extending the temporary
to list intangible products in the customs
totally exempt from customs duty. There-
moratorium on imposition of customstariff. fore, change in the mode of delivery of
duties was to be resolved at the Seattle Goods are tangible and services are these products will not make a difference.
Ministerial. However, no decision to make
intangible. Digitisable goods that can be In the case of audio/video products, de-
the moratorium permanent could either beelectronically transmitted over the Internet livery through the physical mode attracts
taken at Seattle or thereafter. The issue can perhaps be considered as intangible border duty of 62.864 per cent to 68.896
appears to have been put aside primarilygoods on the analogy that these have per cent comprising basic customs tariff
on account of the WTO members not physical counterparts that can be deli- of 35 per cent to 40 per cent plus an
being able to reach an agreement onvered thephysically on a media across a border. additional customs duty equal to domestic
issue of classification of electronic trans- The accompanying table lists goods that taxes. If there is a large-scale changeover
missions. Are they goods or are they are normally delivered physically but can from physical to electronic mode of de-
services? Both Panagariya (2000) and also be digitalised and delivered as elec- livery for recorded audio and video prod-
Teltscher (2000) have pointed out the tronic transmissions over the Internet. The ucts, there would be loss of some revenue.
inherent contradiction in the initial market value of imports given above is taken from Such changeover may not, however, be
access proposal of the US. On the one DGCI&S sources and one suspects that easy. Most consumers in India do not have
hand, it stated that no member of the WTO imports through electronic transmissions computers and Internet access necessary

Economic and Political Weekly September 29, 2001 3665

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to directly receive electronic transmissions. deliveries. This brings us back to thegoods may be exempted from customs
Direct Internet purchases are also con- question of classification of electronic duty or if, on revenue considerations, a
strained by a lack of adequate e-money transmissions. If such transmissions are digitisable good cannot be fully exempted
transfer system. As Panagariya (2000) classified as goods, they will be subject
from customs duties, a service tax equal
points out, the likely scenario would be to the GATT regime and the Nationalto the total customs duties inclusive of the
where local producers will receive the domestic excise component should be
Treatment principle will not allow a higher
excise or VAT on such imports than what
product electronically and convert the same levied when such a product is electroni-
into physical form such as tapes and CDsis domestically levied. There would, how- cally transmitted. India is beginning to
for subsequent sale to consumers. Such ever, be no such problem ifWTO members widen its service tax base by bringing in
activity would involve local production more and more services into the domestic
agreed to treat all electronic transmissions
costs and attract domestic taxes in any as services. As services, these would be tax net. On both revenue and equity con-
caseand therefore, the loss would be subject to the GATS regime under which siderations, similar imported services
on account of the basic customs duty of higher excise/VAT levies can be imposed delivered electronically must also be
to counter-balance tariffs on physical
35-40 per cent. In the case of large scale equally taxed. Such an approach would
changeover from physical imports toimports, so long as a member country have has the support of the EU which favours
direct transmissions to consumers, thenot committed to extend National Treat- classification of electronic transmission of
ment
loss would have been greater in the to such a service in its national digitisable goods as services and also
schedule.
range of 63-69 per cent, the present level favours collection of VAT on such trans-
of total border duty. This, however, is On balance it would appear advanta- missions. India can also hope to learn from
not likely to happen in the short to the experience of EU and other OECD
geous for India to advocate classification
medium term. of electronic transmissions as services and countries that are busy finding a solution
Panagariya (2000) has a few solutions to keep its option open to selectively taxto the problem of collecting taxes on
to offer which look attractive from India's such transmissions. On grounds of eco- e-commerce. Though the US is presently
point of view. To overcome potential nomic efficiency, remaining digitisable leaning towards classification of electron-
harmful efficiency effects of subjecting
digitisable products delivered by different Table: List of Digitalisable Goods with Current Duty Rates under Indian Customs Tariff
means to different duty regimes, his first HS Code Product Description Import Value Duty Rate*
simple solution is to exempt such products (2000-01) (Per Cent)
from border tariffs altogether. As India has (Rs million)

done so for several of such products, it may Films, Recorded

not be difficult to exempt the few remain- 3705 Photographic films 26.89 50.8
3706 Cinematographic films 85.21 50.8
ing digitisable products such as the audio
Printed Matter
and video products. This could also be
4901 Printed books 3395.74 0
achieved by India and other WTO mem- 4902 Newspapers, journals 326.86 0
bers agreeing to making the customs duty 4903 Children's picture, drawing or colouring books 0.50 30
moratorium on electronic transmissions 4904 Music, printed or in manuscript 0.72 0
4905 Maps, charts and atlases 35.32 0
permanent, in which case digitisable goods
4906 Plans and drawings 1519.97 0
exported from India would also get duty
4907 i) Unused stamps, bank notes 2574.60 0
free treatment abroad. Such exports, how- ii) Cheque forms 15
4908 Transfers 111.87 50.8
ever, constitute only a small fraction of 4909 Printed cards 3.37 30
India's e-exports. Heeks (1998) has pointed4910 Calendars 18.14 30
out that software services accounted for 4911 Other printed matter (exc printed software) 182.65 30
95 per cent of exports whereas software Audio and Video Products

packages constituted only a small fraction. 852410 Gramophone records 58.53 62.864
852432 Audio CDs 2.67 62.864
There are similar findings by Chakraborty 852439 Video CDs 621.02 62.864
and Jayachandaran (2001) as vIell as852451 Recorded tapes of width up to 4mm 188.90 68.896
Joseph and Harilal (2001). Teltscher (2000)852452 Recorded tapes of width > 4mm up to 6.5mm 34.13 62.864
852453 Recorded tapes of width > 6.5mm 180.93 62.864
has opined that although there is no im- 852460 Magnetic cards 4.64 50.8
mediate harm to government revenue from852499 Others, recorded with sound or image 6062.04 62.864
such a moratorium, the advantage from a Software
developing country perspective is not clear, 4911 Printed software 642.29 0 for IT Software
38.736 for others
nor does making the moratorium binding
852431 CDs 125.01 -do-
and indefinite seem to be a pre-condition 852440 Tapes 23.49 -do-
for the spread of e-commerce. 852453 Recorded tapes of width > 6.5mm containing software 4667.64 -do-
852491 Other recorded media 340.68 -do-
The second suggestion of Panagariya
852499 Cartridges containing software 3831.89 -do-
(2000), therefore, looks more attractive. If
Video Games
a country cannot eliminate tariffs on physi-
950410 Video games used with TV 180 40.40
cal imports of digitisable goods, it could
impose a higher excise duty or VAT on * Duty rates given here apply in general to a product gro
excise duty and 4 per cent special additional duty. There
such products supplied over the Internet 15 per cent duty.
by an amount equal to the tariff on physical Source for import value: DGCI & S.

3666 Economic and Political Weekly September 29, 2001

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ics transmissions of digitisable products as aptations would be necessary keeping in
exporting and the kind of market access
'goods' and wants a permanent customs available for such services abroad. Ulti-
view the unique nature of e-commerce.
duties moratorium on their import, it may mately, our choice between mode 1 and
also ultimately agree if such transmissions Multilateral
mode 2 may be driven by the industry need Cooperation
are not considered as importation of to seek greater market access for such
goods and therefore not subjected to The borderless world of e-commerce
e-services in which we have stronger export
customs levies. potential. However, this will be an issue
requires greater degree of multilateral
While agreeing to classification of elec-for negotiation as all members must arrive
cooperation in the areas of regulation and
taxation as the distinction between inter-
tronic transmissions as services, it is alsoat an agreed choice as in the case of clas-
important that the WTO members agree onsification of digitalised products. national and domestic transactions is
classification of the mode of supply. GATS getting blurred. Early this year, in the
recognises four modes of supply, namely,Other Issues context of profit taxation, OECD's Com-
mode 1: cross-border supply, mode 2: mittee on Fiscal Affairs gave a ruling that
consumption abroad, mode 3: commercial The WTO work programme on e-com- a web site is not a permanent establish-
presence and mode 4: movement of natural merce is quite broad and outlines manyment but a server location is. While many
persons. When a service is supplied throughissues for consideration by five WTOhave hailed it as a landmark ruling, it
the Internet across a border, it is possiblebodies, namely, the Council for Trade in appears to be a stop-gap solution.
clearly
to classify the same under mode 1 as cross-Services, the Council for Trade in Goods,
The nationalistic concept of permanent
border supply and treat the transaction toCouncil for TRIPS and Committee for establishment is getting fast outdated in
have taken place in the country of buyer'sTrade and Development apart from the context of e-commerce. As Adams-
residence. This will enable the importingthe General Council itself. There are also Tait (2001) points out, a server location
country to apply its own regulatory regimeother international organisations likecan be an absurd basis of tax that defies
UNCITRAL, UNCTAD, WIPO, ITU, ISO, reality. Web sites can be moved from one
to ensure the buyer's interest. On the other
hand, if it is classified under mode 2 asetc, who are working on many of these country to another in no time and identical
consumption abroad, the regulatory re-and other trade-related issues. Sen (2001) web sites can be created in many countries
gime of the country of supplier's residencehas identified several issues of concern with a centralised redirection service that
sends customers to the web site located at
will apply. Panagariya (2000) has pointedfrom India's point of view and has also
out that the consumer protection objective raised the question if all these issues
a server in a country with the lowest taxa-
will pull the choice of classification inshould be dealt by WTO itself or shouldtion. Web sites can also be created without
favour of mode 1, whereas market accessbe left to be dealt by other specialised fixed location. He feels that the attempt
objective will pull the choice of classifi-international bodies. The more important
to treat a computer as being the location
cation in favour of mode 2 as many coun-issues are: of a business is a huge mistake as it is the
tries have made greater commitments for (i) access to telecommunication infra-hardest thing to pin down.
liberalising trade in services under the same.structure and Internet services as well as The answer perhaps lies elsewhere.
He favours classification of e-services computer hardware and software; Harmonisation of domestic tax rates and
under mode 1 on the ground that during (ii) access to Internet management; avoidance of tax competition may prove
UR and post-UR negotiations, countries (iii) security, authentication and certi-useful. Even for domestic taxation pur-
viewed e-transactions as cross-border trans-
fication of data and digital signature; poses, some amount of international co-
actions and have made commitments ac- (iv) data protection and privacy; operation and discipline will become
cordingly. Classification under mode 1 (v) consumer protection; necessary apart from finding an effective
would also ensure applicability of tax (vi) protection of intellectual property;way of taxing e-commerce. Recent EU
regime of the importing countries and vii) local and multilateral rules for stateproposal to register non-EU companies
regulation and minimal policing to keep(with more than 100,000 Euros worth of
protection of the consumer interest as per
the applicable regulatory regime. There-the cyberspace crime free; and annual Internet sales) for VAT purposes
fore, as an importing country it will be(viii) multilateral cooperation in these in any one of the EU countries has gen-
better for India to prefer classification areas
of as well as in the area of domestic erated a lot of debate both within EU and
e-services under mode 1. However, as an taxation. outside. European governments are con-
exporter of e-services, India may find itAll these issues need not necessarily be cerned that such an arrangement will
more beneficial to seek classification under encourage registration in the single EU
addressed at WTO fora. For example, the
mode 2. Firstly, it will stand to gain greater Hague Conference on Private International
country with the lowest VAT rate, namely,
market access under existing mode 2 Law is discussing ways to deal with trans- Luxembourg. Foreign companies want-
commitments of other member countries. national civil and commercial disputes.ing to do e-commerce in EU are also
Secondly, small and medium sized enter- All that is needed is that India should concerned but more about the compliance
prises exporting e-services to developed actively participate in such discussions burden
to than the pricing implications of
countries may find it prohibitively costly secure its interest while international rules adding on the VAT [Daniel 2001].
to subject themselves to regulatory regimes are being made. On-line cross-border trans- In future negotiations, it appears to be
of these countries under mode 1 in the actions need to be governed and protected advantageous from India's point of view
event of any dispute by consumers abroad. by laws to ensure consumer and business to support classification of electronic trans-
A balance has, therefore, to be struck confidence. Parallels already exist in the missions as 'services'. At the same time,
between such conflicting interests keeping world of shipping and aviation involving we should identify the e-services in which
in view the kind of e-services we are cross-border commerce, but suitable ad- we have greater export potential and seek

Economic and Political Weekly September 29, 2001 3667

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greater market access for such services
along with recognition abroad for educa-
tional and professional qualifications
obtained in India. Seeking greater access
to telecommunication infrastructure,
Internet services, and modern technology
including hardware and software should
also be on our agenda. India should at the
same time effectively participate at inter-
national fora dealing with data protection,
privacy issues, intellectual property issues,
e-commerce regulation and tax harmoni-
sation initiatives. Once international rules
are made without our participation, we
would find it very difficult to seek alter-
ation to such rules at a later stage. It is
important, therefore, to actively partici-
pate in the discussions while the issues are
being thrashed out, some of which under-
standably may take years to reach inter-
national consensus. Our domestic agenda
should include improvements in infrastruc-
ture for e-commerce, a hassle-free legal
and certification framework and tax re-
forms enabling levy of service tax on Teltscher, Sussane (2000): 'Tariffs, Taxes and someone who would be equally certain of
imported and indigenous e-services with Electronic Commerce: Revenue Implications the meaning of Sanatan Dharma as well.
provision to tax imported e-services at a for Developing Countries', UNCTAD, Geneva. The Lord has willed it that way. The second
higher rate to counter-balance customs There are people more qualified than us
duties on physical delivery of digitisable to elaborate on the various ramifications
goods. MT1 of the New York crisis. What we plan to
[The views expressed here are the personal views
do is to share with our readers some
of the author. The genesis of the article was a amazement at the mode of expression that
presentation made earlier at the World Trade president Bush has employed over the past
Centre, Mumbai, on August 31, 2001.]
few days. It was not president George
speaking but rather St George speaking,
References or so it seemed. What does a highly
religious man say or, more accurately,
Adams-Tait, Gregory (2001): 'Server Location Is
an Absurd Basis forTax', The Financial Times,how does he speak? To carry the compari-
January 16. son a little further, how does a funda-
Chakraborty, Chandana and Jayachandran, C mentalist speak? It should not be very
(2001): 'Software Sector: Trends and
difficult for any one of us to figure that
Constraints', Economic and Political Weekly,
August 25, pp 3255. out. We live in fundamentalist times.
A
Daniel, Caroline (2001): 'Europe Toys with Taxing number of us are required to hear
the Internet', TheFinancial Times, January 16.
Heeks, R (1998): 'The Uneven Profile of Indian
or read nothing else. As such we are
witness
Software Exports' quoted in Teltscher (2000). to an almost unending flow of
fundamentalist words.
Joseph, K J and K N Harilal (2001): 'Structure
and Growth of India's IT Exports', EconomicA fundamentalist is always certain what
and Political Weekly, August 25, pp 3263.
he means by the terms he employs. He has
Panagariya, Arvind (2000): 'E-Commerce, WTO
and Developing Countries', http:// no doubts of any kind. He knows what
www.unctad.org/en/docs/ecwto.pdf virtue is all about. He knows what Nizam-
Sen, Agneswar (2001): 'Discussion Paper one-Mustafa is, for example. There would be
E-commerce in WTO', mimeo.
feature of the fundamentalist discourse is
that its value system is non-negotiable.

Everyone a Fundamentalist?
The fundamentalist's is the best system of
thought and management that is available
to humankind. To argue that there could
be a plurality of ideas which could be
equally valid is for the fundamentalist
The mode of expression employed by president Bush in the past
sacrilege. Nothing could be more
few days has been startling indeed. It has not been president
blasphemous.(A modem, apparently non-
George Bush but St George speaking. religious, fundamentalist would perhaps
use a more moderate term, unacceptable.
GPD are missing or dead. They have also But the effect is not any the less damag-
mentioned the number of German and ing.) The third feature of the fundamen-
ver since the bombings in New English, in short European casualties, if
talist discourse is the moral fervour with
York have been in the news, thereCNN reports are anything to go by. which the fundamentalist talks. He is certain
is understandably much writing and, Maybe, the Americans do not want tothat double standards are natural and jus-
of course,talking on the subject. We are hurt Pakistani feelings. Pakistan is crucialtified in our world inasmuch as some people
bound to have some stake in talking about to American calculations today. Osamahave God's authority to do what they will
the tragedy as after the Americans we havebin Laden has suddenly put Pakistan onbecause they are doing all that they are
lost the maximum number of people there, the American horizon, if he has actually doing in the name of a higher value which
as the foreign minister Jaswant Singh done what everyone suspects him to havenaturally is not questionable. The fourth
pointed out the other day. So nobody can done.Anyway there was Musharraf mak- feature would be to believe and assert that
actually tell us to 'lay off as Musharrafing one more clever speech, trying to extractthose who do not believe in a given value
did, breaking into English in the course aofprice from the Americans. He might even system are evil or are inspired by evil. One
his Urdu speech. We as Indians generally get what his envoy in Washington so clearly can go on in this vein. But this list should
don't give up our right to speak. In this
laid down as a quid pro quo in terms ofbe as good as any other. Now consider
particular case we are the aggrieved party.
long-term security in south Asia. What thatwhat the president Bush has been saying.
means is quite clear. One does not know
There is therefore no question of our "lay- He has said that it is a war against the
ing off' as the Pakistan president would if domestic opinion in Pakistan would allowvalues of America. He has also argued that
want us to. It is a pity that the Americans
him to play the 'wisdom-and-intelligence' this is an attack not on some buildings in
hardly ever mention the number of Indians game that he asked his 'humvatan' (country-New York and in Virginia but rather on
dead or missing in the World Trade Centre men) to appreciate. It is not going to bea way of life, on the sacred values of
tragedy. So far they have mentioned only easy, may even be near-impossible. Let us freedom and democracy.These values, as
the number of countries whose nationals wait and see. Americans understand them, are not ne-

3668 Economic and Political Weekly September 29, 2001

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