The revised treaty went off to a sour start when the visiting Indian Commerce Minister, upon signing the treaty, declared that the 4 percent countervailing duty or additional duty being imposed on Nepali readymade garments could not be waived as it did not constitute a customs duty and was levied to offset the excise duty levied on similar domestic products. The treaty does not bar India from imposing an additional duty equivalent to excise duty. If the 4 percent duty in question is indeed that, then the minister is right. The Nepali side should have demanded its removal and had it specified in the treaty. A new paragraph added to the Protocol to Article V only says that the Indian government shall consider waiver of duties over and above the additional duty corresponding to excise duty if requested by the Nepali government. The duties in question are specified as those levied under Section 3(5) of the Customs Tariff Act, 1975 of India, which defines them as duties levied to counterbalance the “sales tax, value added tax, local tax or any other charges for the time being leviable on a like article on its sale, purchase or transportation in India.” The Indian side also defended the imposition of the 4 percent duty on maximum retail price as against import price. If the duty is indeed levied to counterbalance an excise duty, levying it on maximum retail price may not be entirely wrong under Customs Tariff Act, 1975 of India. If it is a duty under Section 3(5) of the Act, it cannot be levied on retail price. Thus, in the absence of proper homework/research by Nepali authorities, a much ballyhooed provision in the treaty has come a cropper.
The list of primary products qualifying for duty-free and quota-free access has been expanded but it was unnecessary to list some of the products as they were already eligible for preferential treatment.
What has also been overlooked by Nepal is the non-binding nature of the provision for waiver of additional duties other than that counterbalancing an excise duty. That India “shall consider” waiver at Nepal’s request does not make it mandatory for India to remove it. Our negotiators have been caught napping. And there is more to it. The possible waiver of such additional duties being applicable only to products of “medium- and large-scale” manufacturing units leaves open the room for applying them on products of small-scale units. In addition, the Protocol to Article I says that the two sides “shall undertake measures” to “reduce or eliminate” non-tariff, para-tariff and other barriers that impede promotion of bilateral trade. This weak formulation does not entail a binding commitment to categorically eliminate such barriers.
The attempt to address the problem of lack of mutual recognition of standards and testing, which constitutes a formidable non-tariff barrier to Nepali exports, is half-hearted. As per the revision, both countries “shall” grant recognition to the sanitary and phyto-sanitary certificates (including health certificates) issued by the competent authority of the exporting country “based on assessment of their capabilities”, subject to the “mandatory requirement of the importing country”. The relatively strong word “shall” notwithstanding, the problems faced by Nepali exporters related to quarantine and technical standards are not going to be over in a jiffy as there is to be an “assessment of capabilities” of relevant Nepali institutions. Much will hinge on the implementation of India’s pledge (couched in a best endeavors clause) to assist Nepal in improving its technical standards, quarantine and testing facilities and related human resource capacities. The provision for mutual recognition excludes forest products as it only specifies food and agriculture products, though forest products are also subject to quarantine testing. So until “assessments” are made and Nepal’s “standards” upgraded through India’s largesse—which may take an eternity—traders in west Nepal, for example, who want to export agricultural and forest products to the western part of India will continue to take a circuitous, costly route, from west Nepal to Kakarbhitta in east Nepal for quarantine checking on the Indian side of the border and then back to the export destination.
The list of primary products qualifying for duty-free and quota-free access has been expanded to include floriculture, atta, bran, husk, bristles, herbs, essential oils, stone aggregate, boulder, sand and gravel. But it was unnecessary to list some of the products as they were already eligible for preferential treatment—for example, the existing list of eligible primary products included flour (atta is one type of flour) and forest produce (herbs come under non-timber forest products). There is a need to make the list clear and precise, based on standard international classification, to remove ambiguities and arbitrariness in interpretation. As things stand now, either country can impose customs duty on products not mentioned in the list, whereas the very first point on the list reads “agriculture, horticulture and forest produce and minerals which have not undergone any processing”—which is quite all-encompassing. Besides, Nepal’s strategy should be to add value to products such as herbs and essential oils through processing rather than exporting them in raw form.
It has been agreed to calculate value addition for Nepali manufactured products to get preferential access to India on a free-on-board, rather than ex-factory price, basis. This is of little help as stringent rules of origin—30 percent value addition and change-in-tariff heading at 4-digit level—that are beyond Nepal’s current level of industrialization and supply capacity have not been relaxed. The quantitative restrictions slapped since 2002 on four Nepali products—vegetable ghee, acrylic yarn, zinc oxide and copper wire rod—remain. Indian manufactured goods, meanwhile, will continue to get preferential treatment from Nepal without having to meet any rules of origin.
On a positive note, the revised treaty scraps the illogical, inefficient and bureaucratic Duty Refund Procedure that infringed upon a nation’s sovereign right to collect taxes within its territory. Nepal will now have a direct control over the customs duty revenues on the import of manufactured goods from India. However, contrary to media reports, one cannot say for sure Indian goods will be cheaper. Where the import duty imposed by Nepal is higher than the Indian excise duty, there will be no price change. Where the reverse is true, the removal of excise duty on Indian manufactured exports will surely reduce the border price. But whether the reduced border price will translate into reduced wholesale/retail prices depends upon whether Nepali traders pocket the gains or pass them on to consumers, which in turn depends upon the elasticity of demand for such goods and the degree of competition.
A revision to the Agreement on Cooperation to Control Unauthorized Trade, traditionally signed along with the trade treaty, allows for export of goods imported from each other to third countries, without any manufacturing activity. The prohibition of re-exports of goods imported from third countries without manufacturing activity to each other has, however, been retained. India’s long-standing complaint has been that third-country goods are finding their way illegally into India. Illegal cross-border trade is an even bigger problem for Nepal, given the relatively small size of its economy and high trade dependence on India. The crux of the problem is the 1800-km open border. It not only frustrates economic policies—trade, monetary, fiscal—but is also a serious security-related matter. Without border regulation, the Agreement alone cannot make much difference.
Don’t blame the other side. Blame our own officialdom.
kharelparas@yahoo.com
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