What will be the implications if India pushes for custom duty on electronic transmission, especially in the semiconductor ecosystem?

India wants to impose customs duties on digital exchange, but other WTO members want to extend the moratorium. All eyes are now on the WTO's February conference

By Naandika Tripathi Forbes India Staff

Published: Feb 6, 2024 11:03:16 AM IST

Updated: Jun 20, 2024 04:18:04 PM IST

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India has proposed to get back to its stand of imposing customs duties on electronic transmissions. This comes in the run-up to the WTO's 13th Ministerial Conference, scheduled in three weeks in Abu Dhabi. Since 1998, World Trade Organization (WTO) member countries have agreed not to impose customs duties on e-transmissions (the trade of digital goods). It is the only WTO provision that applies explicitly to e-commerce and has been in place for 26 years. The 164 members have been temporarily extending the moratorium every few years during the WTO Ministerial Conference. The last extension took place in June 2022 at Geneva, and it is due to lapse at the 13th WTO Ministerial Conference.

Any data or information delivered electronically without a physical medium, such as software accessed online, cloud services, e-books, e-music, online videos, and games, is termed electronic transmission. The absolute definition, however, is still unclear, which is leading to uncertainty around it.

India pushed for implying customs duties at the 12th Ministerial Conference, but later agreed with the extension of the moratorium. This time, some WTO members, including India, South Africa, and Indonesia, have voiced uncertainties about a further extension or a permanent moratorium, citing a huge loss of revenue and hurting digital development, as domestic players face intense competition from global big tech companies. The losses of developed countries are minimal as compared to those of developing countries.

During the last conference, Commerce and Industry Minister Piyush Goyal said that between 2017 and 2020, developing countries have lost potential tariff revenue of $50 billion only on the import of 49 digital products. He further added, “By 2025, this revenue loss is estimated to be $30 billion every year. Imagine what public good can be done using these resources.”

With a growing digital economy, digital trade is bound to increase. Between 1995 and 2018, it grew from less than $1 trillion to nearly $5 trillion, most of it electronically delivered as per the Organization for Economic Co-operation and Development (OECD). Experts point out that the exclusion of customs duties has played a critical role in the development of global digital trade. Imposing duties would heavily impact companies that are dependent on trading in software, games, and other digital products.

According to the OECD, the overall revenue implications of the moratorium are small; tariffs on electronic transmissions would hit low-income countries the most. Countries that impose such duties would face longer-term harms due to a less predictable investment climate, reduced foreign direct investment, and reduced access to knowledge, information, and digital tools needed by local workers, artists, patients, students, consumers, and other constituents.

The International Chamber of Commerce (ICC) and over 170 business associations from across the world are calling WTO members to renew the moratorium at the upcoming conference. “Allowing the moratorium to expire would be a historic setback for the WTO, representing an unprecedented termination of a multilateral agreement in place nearly since the WTO’s inception—an agreement that has allowed the digital economy to take root and grow,” they said.

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According to WTO estimates, digitally delivered services have recorded an almost fourfold increase in value since 2005, rising 8.1 percent on average per year over the period 2005–22, outpacing goods (5.6 percent) and other service exports (4.2 percent) to account for 54 percent of total service exports. Today, an estimated 5.4 billion people, or 67 percent of the world’s population, are able to connect to the internet, doubling the number of people connected only 10 years ago. Yet, 2.6 billion people, or one-third of the global population, remain offline, most of them in low- and lower-middle-income economies.

Impact on the semiconductor design ecosystem in India

Industry bodies have pointed out that the customs duty imposition would heavily impact semiconductor chip design in India. The companies have multi-locational or multi-country design activities. During any chip design activity, the data is exchanged from one location to another every day. Some of the work is done in India, the rest is done in other countries, and all these things finally come together. There are five-six stages to the design itself, and at each stage, the files are being exchanged at multiple locations, explains Ashok Chandak, president of the India Electronics and Semiconductor Association (IESA). Companies like Intel, Applied Materials, Qualcomm, NXP, and 30 other members of IESA that have captive design centres in India will have to bear the brunt.

He further adds that this is typical of the chip industry, which has mostly global multinationals as key companies worldwide. The number of Indian-made chip design companies is very small. There are some popping up now. “Even though companies like HCL, TCS, and Wipro do chip design activity, they have to send the data back to the headquarters or location of the chip company. So they will also face trouble,” says Chandak. Most global semiconductor companies would be impacted because that is how their operations are structured. There is hardly any company that has 100 percent localised ownership of any design activity.

“The issue is, if you try to tax the data or these files, on what basis? There is no pricing attached to it, and there is no MRP defined for it. There is no way to do the valuation as well. So, if you're to tax it, there's no basis on which you can tax it. If at all it is done, it could lead to multiple back-and-forth negotiations, discussions, and litigations. It is going to be troublesome. And from IESA, we've already made the recommendation that this should not be taxed,” Chandak tells Forbes India.

Neil Shah, vice president of Counterpoint Research, concedes that if the government unilaterally imposes duties on electronic transmission, it could disrupt global cross-border operating tech companies, from digital design to services to cloud and commerce companies. “However, we see why the government wants to do this: To boost local digital content, design, software, and service creation, which would drive impetus to employment, the economy, and intellectual property creation in the long term.”

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This is a double-edged sword as the timing is not ideal when the government is looking to push for Digital India, semiconductor, and design PLI, with reliance on cross-border global tech giants. This could bite back, and the timing is not right now for the push to import tariffs on digital transmissions, adds Shah. The government can be more prudent about this by taking a phased approach and being selective first on the transmissions that could be levied with tariffs, especially sectors that are unlikely and unfavourable with respect to the long-term digital and make-in-India strategy and need a jolt to attract those companies to localise further in India from both an IP and consumption perspective.

“The government’s perspective stems from the confidence that Indian enterprises are in a very unique position as the only large-scale and fastest-growing digital economies globally, which is open for all companies to operate, unlike China, but with a growing caveat that interested parties should cash in on this growth potential to also add value to the Indian economy,” concludes Shah.