The India – Singapore FTA (Free Trade Agreement) for goods was notified by the customs on 22 July to take effect on imports on or after 1 August. The four notifications on the subject provide for three cuts of 100 percent, 95 percent, and 90 percent on the normal duty of 15 percent. The fourth notification lays down the rules of origin to ensure Singapore parentage of the import goods.

The zero duty is applicable on 508 lines (9.9 percent of the total 5123 lines). The 95 percent cut covers 2413 lines (47.1 percent in the total). This works out to only 0.75 percent of the CIF value of goods. On 2202 lines that is 43 percent of the total, the cut of 90 percent will apply on the normal duty of 15 percent. This works out to 1.5 percent on the CIF value.

The full duty of 15 percent will be applicable on the remaining 7000 tariff lines in the total of 12,000 in the customs tariff schedule. The other duties, namely, countervailing duty of 16.32 percent, excise duty and sales tax duty of 4 percent (IT Agreements) will apply on the FTA goods.

Singapore has agreed to eliminate customs duties on all goods of Indian origin from 1 August, 2005 which is the date of implementation of the agreement. The goods FTA is a key part of the Comprehensive Economic Cooperation Agreement (CECA) was concluded between the Prime Ministers of India and Singapore on 27 June 2005 after 13 rounds of negotiations spread over two years covers goods, services and investments besides review of double taxation agreements.

Strings attached: The apparent zero duty treatment to two out of every five lines in the 12,000 lines of customs tariff schedule is backed by safeguards which make sure that the goods are of Singapore manufacture. The Rules of Origin notified required that the outside material should be limited to 60 percent of the value of the product. The direct method for calculation of 40 percent domestic value addition may also be used as a substitute for the indirect method which limits outside material to 60 percent of product value. Under this, the value addition in the exporting country, namely, value of origin plus overheads plus profit together must constitute the 40 percent of the value of the final product.

Besides this, the goods must satisfy the Substantial Transformation Rule (STR) which requires change of heading at four digit level between foreign raw material and the final product. There is another defence in the specific product rule in Annexure 3A of the main agreement for 267 specific product lines where other riders are placed in such as prohibition on sugar of outside origin in food products, prohibiting of used inputs on the same four digits heading at that of the final product.

Protection to some: We have analyses the structure under the 5123 lines in the agreement. The results show that the sensitive sectors are, by and large, excluded from the coverage. These include petroleum products, plastics, textiles specially garments, ceramic products, steel, and motor vehicles, specially four wheelers and two wheelers. The IT sector with its 217 tariff lines under the IT agreement is well covered since imports are already at zero duty. (It is a moot point whether Singapore origin IT products will satisfy the 40 percent local content and substantial transformation rule. The IT sector is already globalised will need special Rules for trade flow).

India looks towards ASEAN it has already concluded a framework agreement with the grouping besides a special zero for zero duty deal with the demanding Thailand, there will be demands for treating ASEAN goods as domestic material. One can well expect FDI in ASEAN catering to the Indian market and vice versa. The SEZs will, of course, cry foul, they rightly complain about competition zero duty imports from RTAs and Bilateral FTAs. The SEZs sales to DTA must pay the full duty of 15 percent or the four percent ITA duty levied as CVD of sales tax.

The phased duty cut programme is spread over five years with 100 percent elimination on some lines and 50 percent of the normal tariff on the balance by 1 April 2009. There is also a provision for advance ruling and application of risk management technique to minimize customs control.

The Indo-Singapore CECA also provides for standards and SPS measures. The agreements say that only WTO compatible NTBs are allowed in trade between the countries. Other agreements cover guarantees against expropriation of investments, agreement on services trade and other forms of cooperation like that between media. The double taxation agreement between two countries allows exemption to capital gains on Singapore investments in India. The benefit will not be available to shell companies in Singapore.

VAT news: The Delhi Exporters Association organized an interesting session with the VAT Commissioner on 21 July 2005. Apparently, the Commissioner is giving a refund within 15-20 days of the application on the VAT suffered on the raw materials and other inputs going into the zero rated export goods. However, exporters complain that in almost all cases, the department is demanding bank guarantee of at least Rs. 5 lakhs to cover the risk of wrong claims during the verification process.

It is learned that the VAT Commissioner has said that his staff visited exporters premises only on prior appointment and will not walk in at any time to disrupt the flow of activities in the exporters office.

The VAT Commissioner’s staff says that VAT refund can be claimed regardless of use of the raw material in the final product, payment status of the purchase and even delivery of raw material! A VAT invoice is all that is required to claim refund. The implementation of this assurance may well throw up a number of problems, exporters says that the leopard does not change his spots. In actual practice the tax officials will not implement the assurance.