reading material module i
TRANSCRIPT
Certificate Program in Logistics Management: 2010 Foreign Trade Policy
Course Co-ordinator: Prof. T. Chaturvedi
Reading Material: Module I
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Session I: Introduction to the course & Theory of Trade: Why Countries Trade?
Learning Objectives: objective is to understand meaning of various macroeconomic
variables and relate it with the basis of trade, what the gains from trade are and what
the pattern of trade is. To explain how factor differences between countries give rise to
trade between them and why trade is mutually beneficial.
1.1 Understanding fundamental macroeconomic variables and their
interrelationships
1.2 Balance of Payments
1.3 Development of Trade Theories: Introduction
� Absolute Cost Advantage
� Comparative Cost Advantage
Reading Notes
I. Understanding fundamental macroeconomic variables and their
interrelationships
Gross domestic product is the value of final sales; it is also equal to the value added at
each stage of production. The value-added approach to measuring GDP is a cost
approach, where the value of final output is the sum of payments to the factors of
production (wages + rent + interest + profit) plus indirect taxes and depreciation.
1. Measuring Gross domestic product
There are two approaches to measuring domestic output: an expenditure approach,
which measures the value of final sales; and a cost approach, which measures the
value added at each stages of production. The following two-sector, three-sector, and
four-sector models illustrate how GDP is measured by the expenditure and cost
approaches.
A Two Sector Model
A two-sector model consists of a business sector, which hires resources and produces
goods and services, and a household sector, which supplies resource services to the
business sector and purchases the goods and services produced by them. Presented as
circular flow (Fig 2-1), the upper portion of the inner flow show the household sector
providing resource services to the business sector; the lower portion of the inner loop
shows the flow of output to individuals (the household sector). The upper portion of
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the outer loop traces the financial payments made by the business sector to individuals
for the use of resource services. Individuals receive wages, interest, and rent for the
use of resources services, and profits for entrepreneurial talents. In the lower portion
of the outer flow, individuals spend their money income purchasing goods and
services produced by the business sector.
Figure 1
Wages, Interest, Rent, and Profit
Services of Labour, Capital, Natural
Resources and Entrepreneurial Ability
Goods and Services
Money Expenditure for Goods and Service
Example 1. Suppose individuals receive the following payment from the business
sector: wages $ 3900; interest $400; rent$150; and profit $550. One thousand items are
produced and sold to the household sector at an average price per unit of $5. The
market value of final output is $5,000 [$5(1000 items)], which is the sum of total
spending on final output; the cost of producing this output is also $5,000
[$3900+$400+$150+$550].
Household Sector
Business Sector
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Fig. 2 below presents the circular flow of financial payments associated with the
production and sale of final output; it differs from the financial payment in the outer
flow in Fig. 1 in that individuals save a portion of their money income. The amount
that individuals save equals the amount of new plant and/ or equipment purchased by
the business sector. Household saving is a leakage from the circular flow; saving
leakage are reinvested into the circular flow by investment spending, i.e., by the
business sector's purchase of plant and equipment.
Figure 2
Compensation for Services of Economic Resources
Consumption Spending
Household Saving = Investment Spending
Three-and Four Sector Model
Fig. 3 presents a closed economy circular flow among the household, business, and
government sectors. In the upper loop, individuals are paid for factor services and
government receives indirect taxes, which it imposes upon the output of goods and
services. Individuals use their income payments consume, save, and pay income taxes
the government. Government spends its tax receipts; receipts; individuals lend their
savings to the business sector, which invests in new plant and equipment. In the lower
loop, the spending flow includes consumption (c), investment (I), and government
expenditures (G).
Household Sector
Business Sector
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A four-sector model adds international transactions to the three-sector model. Goods
and services available for U.S. purchase include those that are domestically produced
(Y) and those that are imported (Mg); thus, goods and services available for domestic
purchase equal Y + Mg. Expenditures for U.S. and foreign-made goods include
consumption, investment, government, and exports (Xg). Thus, Y+ Mg=C + I + G + Xg.
Subtracting Mg from both sides of the equation, we have Y = C + I + G +Xg – Mg,
where represents domestic output.
Figure 3
Compensation for Services of Economic Resources
Direct Taxes Business Income
Indirect Taxes
Direct Taxes on Income
Government Expenditures (G)
Consumption Spending (C)
Household Saving = Investment Spending (I)
Example 2. Suppose consumption spending is $ 4600; investment spending is $ 500;
government spending is $ 935; and imports are $ 600. Domestic output is $ 6065, found
by summing consumption, investment, government spending, and net exports
(exports less imports) ($4600 + $500 + $935 + $630 - $600]).
2. Other Measures of output
In addition to GDP, other output measures include: Gross National Product (GNP), net
national product (NNP), national income (NI), and personal disposable income (Yd).
Household Sector
Business Sector
Government Sector
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Gross National Product
Gross domestic product consist of all output produced within the boundaries of the
country, whereas GNP includes all output produced by the country’s economic
resources regardless of where they are domiciled. Both measure are of comparable
magnitude and display similar behavior overtime.
Net National Product
Net national product equals GNP less replacement investment (capital consumption
allowances). Each year, some of the economy's capital stock (In) and replacement of
worn-out capital stock (D). Thus, GNP=C+Ig (Gross investment) + G + Xn (gross
exports less gross imports), while NNP =C + In (net investment) + C + In (net
investment) + G + Xn.
National Income
The costs associated with producing net national product include payments to the
factors of production (national income) and taxes imposed by government at
production or final sale. Examples of indirect taxes at production or sale include taxes
on tobacco and liquor products when these goods are packaged, sales taxes, and
business and property taxes. National income is found by adding wages + interest +
rent + profit or by subtracting indirect business taxes from net national product.
Personal Disposable Income
Personal income is the amount of national income which is received by individuals. In
calculating personal income, national income is reduced by corporate retained
earnings and corporate income taxes (corporate profits less dividend payments to
individuals) and net transfer payments made by business and government to
individuals. Personal disposable income is found by deducting tax and non-tax
payments to government form personal income.
Example 3 Table -1 presents gross domestic product, gross national product, net
national product, and national income.
Example 4 Table 2 present national income, personal income, and personal disposable
income.
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Table 1: Gross Domestic Product, (Billion of Dollars)
(1) (2) (3) (4)
Compensation of
Employees
Rents
Interest
Profit
Proprietors' income
Corporate
National income
Indirect business taxes
Net National Product
(NPP)
Capital consumption
allowances
Gross national Product
(GNP)
Plus: Payments of factor
income to rest of the
world
Less: Receipts of factor
income from the rest of
the world
Gross domestic Product
4222.7
122.2
403.6
478.3
586.6
5813.5
679.0
6492.5
754.2
7246.7
215.3
-208.3
7253.8
Personal Consumption
Expenditures
Gross Private domestic
investment
Government Expenditures
Net Exports
Gross domestic product
4924.9
1065.3
1358.3
- 94.7
72.53.8
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Table 2. Personal Disposable Income,(Billions of Dollars)
National income
Less:
Corporate profits
Contributions to social security plus net
interest
Plus:
Government and business transfers to
individuals
Net interest paid to individuals
Dividends paid by corporations to
individuals
Personal income
Less:
Personal tax and non-tax payments to
government
Personal disposable income
586.6
1066.3
1022.6
717.1
214.8
794.3
5813.5
6115.1
5320.8
II. Balance of Payments
THE BALANCE OF PAYMENTS ACCOUNTING
A nation's balance of payments is a summary statement of all its economic transactions
with the rest of the world during a given year. Its main components are the current
account, the capital account and the official reserve account. Each transaction is
entered in the balance of payments as a credit or a debit. A credit transaction is one
that leads to the receipt of payment from foreigners. A debit transaction leads to a
payment to foreigners.
1. THE CURRENT ACCOUNT
The current account includes trade in goods and services, income on foreign
investment and unilateral transfers. The main categories of services transactions are
travel and transportation, royalties and military transaction. Income on foreign
investments refers to the interest and profits received on the country’s. assets abroad
and paid on foreign assets in the country. Unilateral transfers refer to gifts made by
individuals and the government to foreigners and to gifts received from foreigners.
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Exports of goods and services and the receipt of unilateral transfers are entered in the
current account as credits (+) because they lead to the receipt of payments from
foreigners. On the other hand, imports of goods and services and the granting of
unilateral transfers are entered as debits (-) because they lead to payments to
foreigners.
Example 1. Table 1 below presents a summary of the current account of the U.S. for the
year 1993 as it appeared in a government publication (all values are expressed in
billions of dollars; some of the values do not add up because of rounding).
Table 1
Export of Goods, services and income……………………………………………….. 756
Merchandise…………………………………………………………… 457
Services………………………………………………………………… 185
Income receipts on assets abroad …………………………………... 114
Imports of goods, services and income……………………………………………… -827
Merchandise …………………………………………………………. -589
Services……………………………………………………………….. -128
Income payments on foreign assets……………………………….. -110
Unilateral transfer, net………………………………………………………………… - 32
Government grants………………………………………………… -14
Government pensions and other transfers ……………………….. - 4
Private remittances and other transfers…………………………… - 14
Balance of merchandise trade………………………………………………………… - 133
Balance on goods, services and income……………………………………………… - 72
Balance of current account……………………………………………………………... -104
2. THE CAPITAL ACCOUNT
The capital account shows the change in the nation's assets aboard and foreign assets
in the nation other than official reserve assets. It includes direct investments (such as
the building of a foreign plant), the purchase or sale of foreign securities (stocks, bonds
and treasury bills), and the change in the nation's non-bank and bank claims on and
liabilities to foreigners during the year. Increase in the nation's assets abroad and
reductions in foreign assets in the nation (other than official reserve assets) are capital
outflows or debits (-) in the nation's capital account because they lead to payments to
foreigners. On the other hand, decreases in the nation's assets abroad and increases in
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foreign assets in the nation are capital inflow or credits (+) because they lead to the
receipt of payments from foreigners.
Example 2. Table 2. presents the U.S. capital account (in billions of dollars)
Table.2
U.S. assets abroad, net [increase/capital outflow (-)…………………………………. -147
U.S. government assets, other than official reserve assets, net……… -1
U.S private assets, net………………………………………………… -146
Direct investment aboard………………………………………………… -58
Foreign securities ……………………………………………………… -120
Non-bank claims……………………………………………………………...0
Bank claims…………………………………………………………………..32
Foreign assets in the U.S. net [increase /capital inflow (+)………………………….... 159
Direct investment…………………………………………………………. 21
U.S. treasury and other U.S. securities…………………………………. 105
Non-bank liabilities ………………………………………………………. 14
Bank Liabilities……………………………………………………………. 19
Balance on capital account …………………………………………………………….. 12
3. The official reserve account
The official reserve account measures the change in a nation's official reserve assets
and the change in foreign official assets in the nation during the year. A nation's
official reserve assets include the gold holdings of the nation's monetary authorities,
special drawing rights (SDRs) the nation's reserve position in the International
Monetary Fund and the official foreign currency holdings of the nation. Increase in the
nation's official reserve assets are debits (-), while increases in foreign official assets in
the nation are credits (+)
Example 3. Table presents the U.S. official reserve account (in billions of dollars)
U.S. official reserve assets, net…………………………………..-1
Gold………………………………………………… 0
Special drawing rights…………………………… 0
Reserve position in the IMF…………………….. 0
Convertible currencies……………………. ……. -1
Foreign official assets in the U.S. net………………………….. 72
Balance on U.S. official reserve account……………………… 71
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III. Development of Trade Theories: Absolute and Comparative Cost Advantage
Most nations of the world export some goods, services and factors of production in
exchange for imports which could be supplied only relatively less efficiently at home,
or not at all ( e.g., coffee in the U.S., petroleum in Germany, cars in Kenya). Thus, a
great deal of economic well-being of most nations rests crucially on international
interdependence. Interdependence has grown during the past decades as indicated by
the fact that world trade has grown faster than world output.
Example 1. When a U.S. firm wants to export a piece of machinery to Germany, it faces
certain restrictions (such as a tariff) imposed by Germany. It must also overcome
differences in language, customs and laws. In addition, the U.S. firm may receive
payment in the foreign currency which may change in value in relation to the dollar.
No such barriers are involved when the U.S. firm sells its machinery domestically. In
order to analyze the different problems arising from international as opposed to
interregional relations, we must modify, adapt, extend and integrate the microeconomic
and macroeconomic tools appropriate for the analysis of purely domestic problems.
THE MERCANTILIST VIEW ON TRADE
The economic philosophy known as mercantilism (popular from the sixteenth to the
middle of the eighteenth century in such countries as Britain, Spain, France and the
Netherlands) maintained that the most important way for a national to become rich
and powerful was to export more than it imported. The difference would be settle by
an inflow of precious metals – most gold. The more gold a national had the richer and
more powerful it was. Thus mercantilists advocated that the government stimulate
exports and restrict imports. Since not all nations could have an export surplus
simultaneously and the amount of gold in existence was fixed at any one time, a nation
could gain only at the expense of other nations.
ADAM SMITH: ABSOLUTE ADVANTAGE
In 1776, Adam Smith published his famous book. The Wealth of Nations, in which he
attacked the mercantilist view on trade and advocated instead free trade as the best
policy for the nations of the world. Smith argued that with free trade, each nation
could specialize in the production of those commodities in which it had an absolute
advantage (or could produce more efficiently than other nations) and import those
commodities in which it had an absolute disadvantage (or could produce less efficiently).
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This international specialization of factors in production would result in an increase in
world output which would be shared by the trading nations. Thus, a nation need not
gain at the expense of other nations – all nations could gain simultaneously.
Example 1. Table 1.1 shows that the U.S. has an absolute advantage over the U.K. in
the production of wheat and the U.K. has an absolute advantage in the production of
cloth. If the U.S. specialized in the production of wheat and the U.K. in the production
of cloth, the combined output of wheat and cloth of the U.S. and the U.K. would be
greater and both the U.S. and U.K. would share in the increase through (voluntary)
exchange.
Table 1.1
U.S. U.K.
Wheat (bushels/labor-
hour)
6 1
Cloth (yards/labor-hour) 1 2
Smith’s theory of absolute advantage is obviously correct, but it does not go very far it
explains only a small portion of international trade. It remained for David Ricardo,
writing some 40 yea later, to explain the bulk of world trade with his law of
comparative advantage.
DAVID RICARDO: COMPARATIVE ADVANTAGE
Ricardo stated that even if a nation had an absolute disadvantage in the production of
both commodities with respect to the other nation, mutually advantageous trade could
still take place. The less efficient nation should specialize in the production and export
of the commodity in which its absolute disadvantage is less. This is the commodity in
which the nation has comparative advantage. On the other hand, the nation should
import the commodity in which its absolute disadvantage is greater. This is the area of
its comparative disadvantage. This is known as the law of comparative advantage one
of the most famous and still unchallenged laws of economics.
Example 2. Table 1.2 shows that the U.K. has an absolute disadvantage with respect to
the U.S. in the production of both wheat and cloth. However, its disadvantage is less in
cloth than in wheat. Thus, the U.K. has a comparative advantage with respect to the
U.S. in cloth and a comparative disadvantage in wheat. For the U.S., the opposite is
true. That is, the U.S. has an absolute advantage over the U.K. both commodities, but
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this advantage is greater in wheat (6:1) than in cloth (3:2). Thus the U.S. has a
comparative advantage over the U.K. in wheat and comparative disadvantage in cloth.
Mutually advantageous trade could take place with the U.S. exchanging wheat (W) for
cloth (C) with the U.K.
Example 3. With reference to Table 1.2., we see that if the U.S. could exchange 6W for
6C with the U.K., the U.S. would gain 3C (since the U.S. can exchange only 6W for 3C
domestically). To produce 6W itself, the U.K. would require 6 hours of labor (see Table
1.2). Instead, the U.K. can use the 6 labor-hours to produce 12C (see Table 1.2),
exchange 6 of these 12C for 6W from the U.S. and end up with 6C more for itself. Thus,
by exchanging 6W for 6C, the U.S. would gain 3C and the U.K. 6C. There are many
other ratios of exchange of W for C (beside 6W for 6C) that would be advantageous to
both nations . the rate at which exchange actually takes place determines how the
gains from trade are share by the two nations. What that rate itself will be also
depends on demand conditions in each nation.
Table 1.2
U.S. U.K.
Wheat (bushels/labor-
hour)
6 1
Cloth (yards/labor-hour) 3 2
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Sample Class Questions
1 Suppose, in a two-sector model, that individuals receive the following payments
from the business sector: wages $520, interest $30, rent $10, and profits $80.
Consumption spending is $ 550 and investment is $ 90. (a) Find the market value of
output and household saving. (b) what is the relationship of saving and investment?
2 (a) Find GDP from the payment and expenditure flows for the closed economy in Fig
2.6. Assume that individuals own all economics resources (b) Find the sum of leakages
and objection
WAGES $855, INTEREST $62, RENT $ 26, PROFIT $105
INDIRECT TAXES $135
DEPRECIATION Direct taxes $ 115
Gross Investment Saving
$210 $90
Government Expenditures $ 250
Consumption $250
Production Sector
Business Sector Government Sector
Household Sector
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3. From the following data, find (a) national income, (b) personal income, (c) personal
disposable income and (d) personal saving.
Compensation of employees $ 1866.3
Business interest payments 264.9
Rental income of persons 34.1
Corporate profits 164.8
Proprietors' income 120.3
Corporate dividends 66.4
Social security contributions 253.0
Personal Taxes 402.1
Interest Paid by consumers 64.4
Interest paid by government 105.1
Government and business transfers 374.5
Personal consumption expenditures 1991.9
Session II- V: India’s Trade scenario, Regional and Sectoral Trade Flows
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WTO PARAMETERS FOR DECISION MAKING
What is a TRQ?
A tariff-rate quota is a quota for a volume of imports at a lower tariff. After the quota is
reached, a higher tariff is applied on additional imports. Suppose a country replaces its
quota of 10,000 tons with a TRQ of 10,000 tons. The TRQ appears to differ little from
the earlier "absolute" quota. The distinction is that under an absolute quota it is legally
impossible to import more than 10,000 tons, whereas under a TRQ, imports can exceed
10,000 tons but a higher, over-quota tariff is applied on the excess.
In principle, a TRQ provides more market access to imports than a quota. In practice,
however, many over-quota tariffs are prohibitively high and effectively exclude
imports in excess of the quota. It is possible to design a TRQ so that it reproduces the
trade-volume limit of the quota it replaces.
A TRQ has three components:
• a quota that defines the maximum volume of imports charged the in-quota
tariff,
• an in-quota tariff, and
• an over-quota tariff. The values of these three components are part of the AoA
and are defined in member nations' tariff schedules. If the TRQ is scheduled to
be liberalized, the rates at which the quota is to increase or the tariffs to decrease
are also specified.
The illustration demonstrates how TRQ's influence the incentives to trade. The two-
level tariff results in a stepped import supply function. Imports within the quota are
charged the lower tariff; over-quota imports are charged the higher tariff. This results
in a vertical step when the quota volume is filled. The figure illustrates a case in which
domestic demand is sufficient to import the full quota volume at the in-quota tariff,
but the over-quota tariff is prohibitive. That is, the domestic price is below the price of
imports with the over-quota tariff, thus there is no incentive to import beyond the
quota. Were domestic demand to increase, it might become profitable to import at the
over-quota tariff. This opportunity would not be possible with a standard, absolute
quota.
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TRQ administration involves distributing the rights to import at the in-quota tariff.
Whoever obtains such rights can make a risk-free profit of the difference between the
domestic price, and the world price inclusive of the in-quota tariff. The area labeled
‘RENT' in the figure represents the value of these profitable opportunities. Rents
indicate that the demand to trade within the quota is greater than the supply of quota;
thus the necessity to ration or administer the TRQ.
How are TRQ's Administered?
The WTO identifies seven principal methods of TRQ administration. Member nations
are to notify the WTO whether and how the tariff quotas listed in their tariff schedules
are administered. Of the 1,368 tariff-rate quotas notified to the WTO in 1999, more than
half were not enforced and imports entered at the in-quota rate. However, the over-
quota tariff can be reapplied at will. Of the 726 TRQ's that were enforced, license on
demand was the most common method of administration, accounting for almost half
of enforced TRQ's.
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TRQ Administration
Method of TRQ
Administration Explanation
Percent
of all
TRQ's
Applied tariff Unlimited imports are allowed at or below the in-
quota tariff rate; that is, the quota is not enforced.
47%
License on
demand
Licenses are required to import at the in-quota tariff. If
the demand for licenses is less than the quota, this
system operates as a first-come, first-served system.
Usually, if demand exceeds the quota, the import
volume requested is reduced proportionately among
all applicants.
25%
First-come, first-
served
The first quota units of imports to clear customs are
charged the in-quota tariff; all subsequent imports are
charged the over-quota tariff.
11%
Historical The right to import at the in-quota tariff is allocated to
firms on the basis of their trading volume in previous
periods.
5%
Auction The right to import at the in-quota tariff is auctioned. 4%
State trader or
producer group
The right to import in-quota is granted wholly or
primarily to a state trading organization or an
organization representing domestic producers of the
controlled product.
2%
Mixed A combination of two or more of the above methods. 4%
Other or not
specified
Methods that do not correspond to the above methods
or are not specified in WTO notifications.
2%
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Trade Facilitation
Introduction
Negotiations on trade facilitation started in November 2004 pursuant to the WTO’s
July Framework Agreement of 2004. The modalities for negotiations are set out in
Annex D of the July Framework Agreement.
As per the July 2004 Framework Agreement, Trade Facilitation (TF) negotiations
revolve around three pillars:
(a) Negotiations shall aim to clarify and improve relevant aspects of Articles V, VIII
and X of the GATT 1994 with a view to further expediting the movement, release
and clearance of goods, including goods in transit;
(b) Negotiations shall also aim at enhancing technical assistance and support for
capacity building in this area.
(c) The negotiations shall further aim at provisions for effective cooperation between
customs or any other appropriate authorities on trade facilitation and customs
compliance issues.
Article V provides for freedom of transit through the territory of other WTO Members.
Article VIII seeks to rationalize and simplify border procedures, formalities and
charges. Article X requires prompt publication of all trade laws and regulations and
their uniform, impartial and reasonable administration. The aim of Article X is to
enhance transparency and to inspire trust in the fairness of the border control systems.
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The object of these three GATT Articles is to reduce trading costs and facilitate trade.
However, it has been increasingly realized that with the growing importance and the
increasing complexity of international trade, these Articles, which were drafted in
1947, have drifted into obsolescence and so need to be fleshed out by making
additional rules and clarifying the existing provisions. Clarification and improvement
of the relevant aspects of Articles V, VIII and X is the primary task of the Negotiating
Group on Trade Facilitation (NGTF).
Textual proposals
The textual proposals of Members on the various elements of trade facilitation were
discussed by the NGTF. In the ongoing negotiations, Members have submitted a large
number of proposals on Articles V, VIII and X. While a large number of proposals have
come from the developed countries (like EC, Japan, USA and Canada), several
developing countries (e.g. India, Korea, People’s Republic of China, Singapore, Hong
Kong China, Paraguay, etc.) have also tabled proposals. The proposals cover a wide
range of issues connected with import, export and transit procedures and fees. The
main thrust of the proposals is to impart greater transparency to laws and regulations
concerning import and export, and to simplify the border clearance and transit
procedures through automation and adoption of modern methods of control such as
risk management and post clearance audit. The domain of most of the proposals is
confined not just to Customs but also extends to other border agencies as well.
Proposals under Article V of GATT cover, inter alia, inclusion of fixed infrastructure
viz. pipelines and electricity grids in the definition of goods in transit; adoption of
simplified formalities and documentation requirements for expeditious movement of
transit goods; exemption of the traffic in transit from all transit duties and other levies
except for reasonable charges towards transportation and administrative expenses;
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and cooperation and coordination in designing and applying bilateral or regional
transit agreements.
Proposals under Article VIII include: reduction in the number and diversity of fees and
charges levied on importation and exportation and their periodic review; levy of fees
and charges commensurate with the approximate cost of services rendered and not to
be calculated on an ad valorem basis; reduction/simplification and periodic review of
formalities and documentation requirements connected with importation and
exportation; use of international standards for formalities and procedures connected
with importation, exportation and transit; acceptance of commercially available
information and copies of documents for goods clearance; submission and processing
of documents prior to arrival of goods; introduction of a single window system for
filing import/export documentation; prohibition of consular fees or consular invoices
in connection with importation; cooperation and coordination of all border agencies;
introduction of expedited procedures for express shipments; documentary and
physical examination of goods based on risk management for the purpose of
concentrating on the examination of higher risk goods and facilitating the movement
of lower risk goods; post clearance audit; introduction of further simplified clearance
procedures for economic operators which meet the specified criteria; separating release
from clearance procedures and release of goods on the basis of security/guarantee;
establishment and publication of average release and clearance time; elimination of
pre-shipment inspection; and to do always with regulation regarding compulsory use
of customs brokers.
Some of the proposals made with reference to the working parameters of Article
X are: publication of laws, regulations, judicial decisions and administrative rulings of
general application relating to trade in goods; publication on a publicly accessible
internet web-site of customs procedures, and the forms and documents required for
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border clearance; establishment of enquiry points for answering enquiries on trade
related legislation and procedures and providing the information and documents to
interested parties; setting up of an Advance Ruling Authority to issue advance rulings
in a time bound manner on matters such as customs classification, rate of duty,
customs valuation criteria and duty drawback prior to commencement of
imports/exports; providing a reasonable interval between the publication of new or
amended laws, regulations etc. and their entry into force in order to allow traders to
become acquainted with them; entering into prior consultations with stake holders i.e.
seeking comments from stakeholders on proposed new rules or amendment to rules
before their finalization; and putting in place clear, transparent and non-
discriminatory appeal procedures against decisions of customs or other border
agencies.
India’s proposals
In the negotiating group, India has floated a proposal on “Cooperation Mechanism for
Customs Compliance1” along with South Africa, Sri Lanka and Brazil. This is intended
to establish a mechanism for exchange of information and co-operation between
customs administrations on matters such as HS classification, description, quantity,
country of origin and valuation of goods in identified cases of export and import. Such
exchange of information would be very helpful in combating valuation and other
customs frauds. India has entered into bilateral agreements with a few countries for
exchange of such information.
India had commissioned a study in 2005 to identify the constraints faced by Indian
exporters. One of the findings of this study was that lack of uniformity in clearance
procedures at the borders of a Customs Union created uncertainty and acted as a
1 TN/TF/W/123/Rev.2 dated 10 March 2008
59
deterrent to India's exports. In view of this, India has presented a proposal, suggesting
uniformity in border clearance procedures at the borders of a Customs Union.
Consolidated Negotiating Text:
Based on the individual proposals, a draft consolidated negotiating text2 was
submitted by the Chairman of the negotiating group in December, 2009. This was the
basis of negotiations during 2010. It covered a wide gamut of areas in the negotiations
namely those related to Customs Co-operation Mechanism, Publication and
Availability of Information, Prior publication and consultation, Advance Rulings,
Appeal Procedures, Fees and Charges connected with importation and exportation,
Release and Clearance of Goods, Border agency cooperation, Freedom of Transit,
Special and Differential Treatment etc
Possible changes on account of the TF text
The proposed Agreement on Trade Facilitation may necessitate changes in Indian
border management procedures. The agency mainly to be affected by the Agreement
would not only be Customs but also other border agencies. The proposal on single
window would require coordination in the working of the border agencies. The
proposal on risk management would require border agencies to develop risk
assessment modules which would enable them to limit physical examination only to
high-risk shipments. Under the proposal to have “enquiry points” each agency would
undertake the responsibility of answering promptly and correctly the queries that may
be asked by interested parties. The proposal on “expedited shipments” envisages a
liberalized control regime for courier shipments. The proposal on separation of
2 TN/TF/W/165 dated 14 December 2009
60
“release” from “clearance” envisages immediate delivery of goods to the importer on
arrival pending completion of administrative formalities.
61
Agreement on Pre-Shipment Inspection
1. Introduction
Closely linked with customs valuation, but covered by a completely new
agreement, is the subject of pre-shipment inspection. In order to verify the quality,
quantity, price of goods which a country imports or to assure the respect of their
regulations concerning exchange rates and capital, countries have recourse to pre-
shipment inspections. These inspections take place within the territory of the exporting
country and are carried out on behalf of the importing countries by private entities
having the necessary technical expertise. Exporting countries many a time had
complained that these inspections on occasions are applied in a discriminatory manner
and also restrict trade.
The Agreement concluded within the framework of the Uruguay Round defines
in a very detailed manner inspections which are acceptable as well as those which are
not acceptable. The Agreement also outlines the manner in which the practice of so-
called transfer-pricing may be controlled. On a procedural level, the Agreement
provides for exporting countries that they must submit to the decision of the entities
which are engaged in the inspection activities to an independent arbitration in case the
exporting countries are not satisfied with the inspection entities.
The aim of the Agreement on Pre-shipment Inspection is to establish a
framework of rights and obligations, based on non-discrimination and transparency
that provides guidelines for the use of inspection firms, mentioned entities in the
Agreement and for the work of these firms in verifying prices. The Agreement also
62
provides procedures for resolving disputes that may arise between traders and
inspectors.
The Agreement recognizes the need of some developing countries to make use
of pre-shipment inspection ‘for as long and in so far as it is necessary to verify the
quality, quantity or price of imported goods’. It assumes, however, that inspection
entity will be a private company. The use of private specialist companies to inspect
goods before they are shipped, so as to be certain that contractual specifications have
been met, is far from new. Increasingly, however developing countries have made
presentation of a ‘clean report of findings’ from a designated pre-shipment inspection
firm a condition for clearing imports through customs, or for releasing foreign
exchange to pay for imports. The purpose is primarily to check that the real value of
the goods matches their declared value.
Some countries have made pre-shipment inspection a condition for a large
proportion of imports, while others require it only for specified imports, such as those
for government use. From the point of view of the developing countries the real aim is
to prevent fraud and also to reinforce their own customs administrations, ensuring
that value is not under or over-declared. The under-declaration, unless detected, will
result in lower duties being imposed that may result into the loss of revenue. On the
other hand, over-declaration provides an opportunity for illegal export of capital.
The concern of the exporters are that these inspection may hamper trade by
increasing their costs and causing delays. The imposed changes in valuation amounts
to interference in the contractual relationship between buyer and seller. A sensitive
point of governments is that these inspections took place in the exporting countries, on
behalf of importing countries. These concerns were originally raised in GATT in the
Committee responsible for the Tokyo Round Customs Valuation Code.
63
A number of governments around the world, principally in developing
countries, employed commercial inspection companies to verify the customs
classification and value of goods to be shipped to their markets. Typically such firms
operate at sea-ports and airports in developed countries, including the US, where they
examine exporter claims concerning the quality, quantity, price, currency exchange
rate, financial terms and customs classification of goods awaiting to be exported.
The Agreement is primarily designed to require WTO Members employing or
mandating the use of such firms (user members) to ensure that the inspection activities
of the companies they employ are reasonable and do not interfere with legitimate
trade. It also carries obligations for user members, who are expected to ensure
fulfillment of the obligations through their contractual agreements with inspection
agencies. It also ensures for the protection of confidential exporter’s information.
Unreasonable delays in inspection are minimized. The inspection firms use uniform
price verification methodologies. The Agreement also creates a forum for binding
arbitration to resolve grievances lodged by exporters against PSI firms.
The Pre-shipment Agreement applies to all pre-shipment inspection activities
carried out on the territory of any member. Such activities include any contracted or
mandated activity by the government or any government body of a member country.
For the purpose of Pre-shipment Agreement the term ‘user member’ means a Member
of which the government or any government body contracts for or mandates the use of
pre-shipment activities. The Agreement defines pre-shipment inspection as ‘‘all
activities relating to the verification of the quality, quantity, the price, including
currency exchange rate and financial terms and or the customs classification of goods
64
to be exported to the territory of the user member’’.3 Any entity which is contracted or
mandated by a member to carryout pre-shipment activities are pre-shipment entity.4
2. Obligations of User Members5
The core of the Agreement lies in Article 2 which provides obligations of user
members, which accounts for more than half of the total text. Article 2 requires user
members to undertake a range of obligations in respect of activities carried out by PSI
firms on their behalf.
(A) Non-discrimination6
The PSI Agreement ensures that all pre-shipment activities are carried out in a
non-discriminatory manner. It is obligatory on the part of each member to ensure that
the procedures and criteria employed in the conduct of activities relating to pre-
shipment are objective in nature and are applied on an equal basis to all exporters
affected by such activities. They have also to ensure that uniform performance of
inspection is carried out by all the inspectors of the pre-shipment entities contracted or
mandated by them.
3 Article 1.3.
4 Article 1.4.
5 Article 2.
6 Article 2.1.
65
(B) Requirement from Government7
The Pre-shipment Inspection Agreement ensures from every user member that
they must meet the national treatment requirements of GATT Article III.4. In other
words, the user member should not apply rules on sales, use etc. stricter than would
apply to domestic products.
(C) Site of Inspection8
The PSI Agreement ensures from all user Member that all activities related to
pre-shipment, including the issuance of a Clean Report of Findings are performed in
the customs territory from which the goods are exported. The note of non-issuance will
also be issued from the site from which goods are exported. The inspection for all
complex goods can be done in the customs territory in which goods are manufactured.
If both parties agree then also the inspection can be done in the customs territory in
which goods are manufactured.
(D) Standards Employed in Inspection9
The standard adopted in the inspection activities can be determined by the
seller and the buyer of the purchase agreement so that quality and quantity of the
exporting goods are maintained. In the absence of such agreements the standard
employed for inspection will be relevant international standard. An international
standard is a standard adopted by a governmental or non-governmental body whose
membership is open to all members, one of whose recognized activities is in the field
of standardization.
7 Article 2.2.
8 Article 2.3.
9 Article 2.4.
66
(E) Transparency10
Article 2 also imposes a number of requirements on user Members to ensure
that PSI activities are conducted in a transparent manner. User members must ensure
that PSI firms provide exporters with all information necessary for the exporters to
comply with inspection requirements. When requested by the exporter PSI entities will
have to provide the actual information related to pre-shipment activities. This
information includes reference to law and regulations of the user member relating to
pre-shipment activities which also includes procedures and criteria used for inspection
and for price and currency exchange rates verification purpose.
The additional procedural requirements or changes in existing procedures
cannot be employed to a shipment unless the exporter concerned is informed of the
changes made at the time of inspection date. However, in emergency situations of the
types addressed by Articles XX and XXI of GATT 1994, such additional requirements
or changes can be applied to a shipment before the exporter has been informed. But
this does not relieve exporters from their obligations in respect of compliance with
import regulations of the user members. The user members under the agreement has
to publish promptly all applicable laws and regulations relating to pre-shipment
inspection activities in such a manner as to enable other governments and traders to
become acquainted with them.
(F) Protection of Confidential Business Information11
The PSI Agreement requires user members to ensure that pre-shipment
inspection entities treat all information received in the course of the pre-shipment
10 Article 2.5-2.8.
11 Article 2.9-2.13.
67
inspection as business confidential to the extent that such information is not already
published, generally available to third parties or otherwise in the public domain. For
this all pre-shipment entities will have to maintain certain procedures. No member can
disclose confidential information the disclosure of which will jeopardize the
effectiveness of the pre-shipment inspection programm or would prejudice the
legitimate commercial interest of particular enterprises, public or private.
The PSI Agreement further ensures that pre-shipment entities do not divulge
confidential business information to any third party; however they can share this
information with the government entities that have contracted or mandated them. All
confidential business information for which the entities are engaged must be
safeguarded properly. PSI firms or entities may share such information with user
members only to the extent that it is customarily required for letters of credit or other
forms of payment or for customs, import licensing or exchange control purposes.
The user members must ensure that pre-shipment inspection entities do not
request exporters to provide information regarding---
(i) manufacturing data related to patented, licensed or undisclosed processes, or
to processes for which a patent is pending;
(ii) unpublished technical data other than data necessary to demonstrate
compliance with technical regulations or standards;
(iii) internal pricing, including manufacturing costs;
(iv) profit levels;
(v) the terms of contracts between exporters and their suppliers unless it is not
otherwise possible for the entity to conduct the inspection in question.
68
(G) Conflict of Interest12
The PSI Agreement requires user members to ensure that PSI entities maintain
procedures to avoid conflict of interest between pre-shipment inspection entities and
any related entities of the pre-shipment inspection entities in question, such as parent
or subsidiary companies. In addition, governments are to ensure that PSI entities avoid
conflict of interest with unrelated firms also.
(H) Avoiding Delays13
User members must also ensure that pre-shipment inspection entities avoid
unreasonable delays in inspection of shipments. The Agreement also ensures that once
an entity and exporter agree on an inspection date, the pre-shipment inspection must
be conducted on that date unless it is rescheduled on a mutually agreed basis or the
inspection entity is prevented from doing so by the exporter or by force major. Force
major means irresistible compulsion or coercion, unforeseeable course of events
excusing from fulfillment of contract.
Under the Agreement, user members, following the receipt of the final
documents and completion of the inspection ensures that inspection entities within
five working days, either issue a ‘Clean Report of Findings’ or provide a detailed
written explanation specifying the reasons for non-issuance. In case of non-issuance
inspection entities will have to give the exporters opportunity to present their views in
writing and if exporters request for re-inspection, arrange for re-inspection at the
earliest mutually convenient date. On the request of the exporter, a PSI entity must
12 Article 2.14.
13 Article 2.19.
69
further undertake a preliminary verification and promptly inform the exporter of the
results of price and foreign exchange rate.
(I) Price Verification14
The Pre-shipment Inspection Agreement also requires user members to ensure
that PSI entities apply certain criteria to prevent over and under-invoicing and fraud.
For example, user members must require PSI entities to base their price comparisons
on the price of identical or similar goods offered for export from the same country of
exportation under comparable conditions of sale, in conformity with customary
commercial practices and net of any standard discounts, making appropriate
allowances for the terms of the sales contract.
Furthermore, governments must ensure that PSI entities do not base their price
verification on the selling price of goods produced in the country of importation, the
price of goods from a country other than the actual country of exportation, the cost of
production or an arbitrary or fictitious price or value.
(J) Procedure for Appeals15
The Agreement requires user members to ensure that pre-shipment inspection
entities establish procedure to receive, consider and render decisions concerning
grievances raised by exporters. All information regarding the procedure adopted by
these entities must be made available to the exporters. The user members are further
required to ensure that the inspection entities designate certain officials for proper
discharge of the inspection function. The exporters are under obligation to give all
information concerning the specific transaction in question, the nature of grievance
14 Article 2.20.
15 Article 2.21.
70
and a suggested solution. The designated officials are required to take decisions as
soon as possible after receipt of the documents concerned.
3. Obligations of Exporter Members16
The PSI Agreement requires from all exporting members to ensure that their
laws and regulations relating to pre-shipment inspection activities are applied in
purely non-discriminatory manner. For maintaining transparency, exporter members
are required further to publish all applicable laws and regulations relating to pre-
shipment inspection activities in such a manner as to enable other governments and
traders to become acquainted with them. If requested by any user member, exporter
members are directed under the Agreement to provide technical assistance towards
the achievement of the objectives of this Agreement on mutually agreed terms. Such
technical assistance can be given on a bilateral, plurilateral or multilateral basis. Such
assistance include, interalia, tariff and customs administration reforms, simplification
and modernization of systems and procedures and the development of an adequate,
legal, administrative and physical infrastructure.
4. Binding Arbitration17
Article 4 of the Pre-shipment Agreement calls for the establishment of a system
of binding arbitration for grievances that cannot be resolved through the appeals
process mentioned in Article 2 paragraph 21 of the Agreement. The Agreement
encourages the pre-shipment inspection entities and exporters to resolve their disputes
on mutual basis.
16 Article 3.
17 Article 2.21.
71
The arbitration panel must be constituted on mutually agreed basis. The
arbitration system will be jointly administered by the International Chamber of
Commerce and the International Association of Pre-shipment Inspection Companies.
Decisions by the three member arbitration panel-comprising a panelist selected by
each side, plus an independent trade expert---must be rendered within eight working
days of the request for independent review, unless the parties otherwise agree. The
results are binding on the exporter and the inspection entities both. Costs will be
apportioned according to the merits of the case. Although a review by the independent
entity is conceived, yet the parties can carry a dispute under the Agreement as the
governments preserve the right to take disputes about the operation of the Agreement
to the normal dispute settlement procedures of the WTO.
5. Review, Consultation and Dispute Settlement18
Article 6 of the Agreement allows for its review first after two years of coming
into force of WTO and thereafter every three years. In 1996 a Working Party was
established to conduct the review of the Agreement. The Working Party issued three
reports, all of which have been approved by the General Council. Article 7 of the
Agreement provides that upon request a member can consult other members with
respect to any matter affecting the operation of the Agreement on Pre-shipment. In
case of dispute among members Article 8 of the Agreement provides that all dispute
be settled according to Article XXII of GATT and the WTO Understanding on Dispute
Settlement.
18 Article 8.
72
6. Committee
The Agreement on Pre-Shipment Inspection is unusual among the WTO
agreements in not having a special Committee established to look after it. Instead, it is
supervised directly by the Council for Trade in Goods.
7. India’s Position on the Agreement
India is not a user of the shipment inspection Agreements of WTO in the sense
that it has not contracted out its core customs function lime verification of value tariff
classification, description and quality of goods to an outside agency. Its customs
related control functions are performed by the custom House manned by offices of
Central Board of Excise and Customs. However for certain specified purpose like
import of iron and steel scrap from war affected countries, pre-shipment inspection
mechanism is used. The operation of Pre shipment inspection by user countries largely
in Asia and Africa has not been very successful. It has suffered from criticism and
corruption, arbitrary changes in value, high transaction cost, etc. In order to facilitate
export trade; the Export Inspection Council of India (EIC) was set up by the
Government of India under section 3 of Export (Quality Control and Inspection) Act,
1963 as an apex body to provide for sound development of export trade through
quality control and pre-shipment inspection. The Act empowers the central
government to notify commodities and their minimum standards for exports. EIC is
assisted in its functions by the Export Inspection Agencies located at Chennai, Kochi,
Kolkatta and Delhi. It has a wide range of sub-offices and laboratories to back up the
pre-shipment and certification activity. The main functions of EIC are to advise the
Central Government regarding measures to be undertaken for enforcement of quality
control and inspection in relation to commodities meant for export.
73
In the WTO’s regime as India’s trading partners are installing regulatory import
controls, EIC has refashioned its role to introduce voluntary certification programmes,
besides regulatory export control, especially in food sector, and is seeking recognition
for EIC’s certification of official import control agencies of its trading partners as per
provisions of WTO agreements, to facilitate easier access to their markets for Indian
exporters.
The main system of export inspection and certification being followed by EIC
include Consignment Wise Inspection (CWI), In Process Quality Control (IPQC), Self
Certification (SC) and Food Safety Management Systems based Certification (FSMSC).
In order to ensure acceptability of test results of EIA laboratories internationally
it is essential that the ISO:17025, international standard for quality system be
implemented. For this EIA has prepared a basic document i.e. Quality Manual,
Standard Operating Procedures (SOP’s) and are in a phase of stabilizing these. To
supplement these tests 6 labs have been approved by EIC at Chennai, Bangalore, Delhi,
Mumbai.
EIC continues to recognize Inspection Agencies under the provisions of Section
7(1) of Export (Quality Control and Inspection) Act, 1963. The scheme has been aligned
now with international standard on acceptance of inspection bodies, ISO/IEC
17020:1998 to make the same internationally acceptable. Nearly 51 inspection agencies
have applied for recognition as per fresh norms.
In the area of fish and fishery products processing units (145 for EU and 217 for
Non-EU and 31 lives fish processing units for Non EU) are on approved list. In the
eggs products and honey sector Govt. of India has recently banned usages of certain
drugs substances at all stages of production and export of egg products. In the milk
sector during the period of 2003-04, 42 units are on the approved list. Now EIC/EIAs
74
are proposing to initiate certification in the area of Raw (Chilled/Frozen) Meat,
Processed Meat and Animal Casings and have developed a scheme based on a system
of approval of units. Work has also been initiated to develop voluntary schemes in the
area of Quality Control and Inspection for fresh fruits and vegetables for Exports,
HACCP and Organic Certification Schemes.
EIC has continued its activities towards working with overseas governments for
negotiating agreements in the area of Conformity Assessments. Under this EIC has
signed agreements with Singapore, Nepal, Sri Lanka, Korea, Bangladesh, Libya,
Thailand, Mexico, Israel, New Zealand etc.
8. Conclusion
In conclusion it is fair to say that pre-shipment inspection of goods in
international trade has become increasingly common as developing countries
supplement their port of unloading customs inspections by requiring importers to
employ private inspectors to verify price, quality, and other characteristics of goods in
the country of origin. However, the working of the Agreement has also been criticized
as members have complained that the Agreement is not being properly utilized for the
purposes for which it was crafted and there is a possibility that it may take the shape
of one of the non-tariff barrier in international trade in future.
75
Bibliography
Books, Articles and Cases
1. Legal text of the Agreement on Pre-shipment Inspection.
2. John Croome, Reshaping the World Trading System—A History of the
Uruguay Round, Kluwer Law International, 1999.
3. Guide ot the Uruguay Round Agreements, The WTO Secretariat, Kluwer Law
International, 1999, pp. 115-118.
4. Raj Bhala—International Trade Law—Theory and Practice, 2nd edition, Lexis
Publishing 2001, pp. 418-421.
76
Agreement on the Implementation of Article VII of GATT 1994 (Customs Valuation
Agreement)
1. Introduction
The volume of international trade has markedly increased in recent decades.
The rapid expansion of trade has complicated the work of customs administration
making it more and more essential than ever for customs formalities to be simplified
and harmonized as far as possible. The valuation of goods for customs purposes is one
of the key areas in which harmonization of customs procedures is desirable.
The WTO's promotion of unified customs valuation is an important aspect of its
mandate to foster more efficient international trade by establishing worldwide
standards of fairness, consistency and non-discrimination. Enhanced co-operation
among national customs administration is needed in particular in this area of
globalization. If customs administrations are to meet the challenges of this new global
environment, they must co-operate effectively on a worldwide level.
2. The Historical Background
To begin with, a brief summary of the historical origins of the Code may be
helpful for an understanding of how current issues have emerged. Early in the 20th
century, various groups interested in promoting international trade began to study
ways of replacing the diverse and arbitrary national practices of customs valuation
with an international system that would be neutral in its effects on competition as well
as on trade policy. Several initiatives were organised under the auspices of the League
of Nations, but they all proved futile. It was not until 1947 that the first agreement on
general principles of customs valuation was reached and embodied in Article VII of
the General Agreement on Tariffs and Trade (GATT), 1947.
77
Article VII of the GATT, provides that the customs valuation of goods;
-- should be based on the actual value of the goods;
-- should not be based on the value of goods of national origin or an arbitrary or
fictitious values; and
-- should be the price at which such or similar goods are sold in the ordinary
course of trade under fully competitive conditions.
Article VII of the GATT permitted a choice between notional and positive
concepts of customs valuation, but the general principles it established afforded no
specific guidance on how these principles were to be applied in practice.
The Brussels Convention of 1950 which was the next major advance in
international co-operation set forth a definition of dutiable value deemed suitable for
world-wide adoption, the so-called ‘Brussels Definition of Value’ (BDV). The BDV was
the first truly international system of customs valuation, but it was not regarded as
fully satisfactory. It left too much of discretion to national customs administration
leading to uncertainty in application. The BDV had adopted a truly artificial and
purely theoretical approach to valuation, divorced from the concrete realities of
business practices. It also lacked precision which led to the lack of uniformity in
applying the BDV. It failed to achieve universal acceptance as US and Canada never
accepted it. Since it was having the rigid procedure for amendment, it failed to adapt
to new developments in international trade.
The issues were hard fought in the Tokyo Round (1973-79), but Agreement on
Customs Valuation Code was eventually reached. The key to the Agreement was that
all sides concurred that their existing methods of valuation were unsatisfactory and in
need of reform, and that international code could be a vehicle for such reform.
78
Accepted by most developed countries, but by less than a dozen developing countries,
it becomes one of the groups of limited-membership ‘codes’ governing non-tariff trade
measures. It was widely considered as a success.
During the Uruguay Round, the code was re-examined, principally to see
whether some adoption, without changing its basic principles, might make it more
attractive to developing countries. The outcome was a minimally-revised new
agreement, supplemented by two Ministerial Decisions designed to ease developing-
countries fears that the rules would not fully meet their needs. In this Round, the
European Community, the US, Canada and Australia all supporting the 1979
Agreement, only the developing countries opposed, the Customs Valuation
Agreement as it emerged from the Uruguay Round was unchanged in all essentials.
The principal difference between the 1979 and the 1994 Agreement is that
whereas only some countries had joined the Tokyo Round Customs Evaluation Code,
all member state of the WTO (as well as any future members) are now bound under
the integrated GATT/WTO system, and that the WTO Dispute Settlement Mechanism
is expressly made applicable to controversies concerning customs valuation.
3. Concerns for Administration of the WTO Customs Valuation
The methods and criteria of valuation set forth in the Code make it predictable
that certain recurrent tasks and problems must be dealt with by countries who adopt
and implement its system. The technical nature of the agreement is clear at a glance:
it’s Annex I, consisting of interpretative notes to guide the user, occupies as much
space as the 24 Articles of the Agreement itself. This degree of detail is in fact what
gives the Agreement its authority, since it reduces the opportunity for arbitrary
valuation. The basic principles underlying the valuation systems are set out by the
General Introductory Commentary, which clarifies the structure of the Agreement and
79
the relationship between its articles, and also emphasizes the importance of
consultation between the customs administration and the importer.
4. Resources Required in Administration of Customs Valuation
In essence, the Agreement sets up a sequence of six alternative methods of
valuing goods for customs purposes. They are to be applied in a strict hierarchy; only
if customs value cannot be determined under the first method may the authorities use
the second method; only if this second method is inapplicable may they move to the
third, and so on. The starting point for valuation-the priority method--bases customs
value on the transaction value, the price actually paid for the goods when sold for
export to the country of importation. The successive alternatives establish the
valuation instead by the transaction values of identical or similar goods, by looking at
sale prices or production costs, or finally by a fall-back method which gives greater
flexibility but excludes several possible approaches to valuation.
The Agreement’s scope is limited to the valuation of goods for the purpose of
levying ad-valorem customs duties on imports. This is not as strict a limitation as it
may appear. Most countries levy few, if any, duties on exports and by definition no
valuation is required for the comparatively small proportion of duties that are levied
on a specific basis (for instance, according to the quantities or weight of the imported
goods). Although the rules are not formally applicable to valuation for tax purposes or
foreign exchange control, there is nothing to stop them from being used for such
purposes, if national administrations so decide.
80
5. Method of Actual Transaction Value19
The primacy of transaction value as the valuation method is made clear in
Article 1 of the Agreement, whose opening words, ‘The customs value of imported
goods shall be the transaction value that is the price actually paid or payable for the
goods when sold for export to the country for importation.’ These words are qualified
by a number of provisions, which may in fact make it necessary to move on to the
second valuation method, but the preference for the transaction value is clear.
Royalties and license fees not actually included in the price paid or payable should be
added. Other adjustments are also permitted. Article 1 is to be read together with
Article 8 which provides inter alia, for adjustments to the price actually paid or
payable in cases where certain specific elements which are considered to form a part of
the value for customs purposes are required by the buyer but are not included in the
price actually paid or payable for imported goods.20 These elements include (i) cost
incurred by the buyer but included in price of the goods such as commission and
brokerage cost of containers cost of package; value of good supplied by buyer to seller
free of charge or at reduced cost; royalties and licenses fees related to good paid as
condition for sale of good; any part of sale proceeds accruing to the seller. Countries
also have a freedom of frame in their legislation inclusion or exclusion of following
costs: (i) cost of transport (ii) cost of insurance (iii) loading unloading and handling
charges at the port of importation.
However, certain circumstances listed in Article 1 may justify the customs in
rejecting the transaction value of the goods as a fair basis for levying duties. These
include the absence of an actual sale, restrictions attached to a sale, conditions or
19 Article 1.
20 Article 8.
81
considerations whose value cannot be established, or arrangements by which some
part of the proceeds of resale will be passed back to the original seller.
One source of possible concern will be a situation in which the buyer and seller
are related—a situation which in fact arises frequently, since much of international
trade takes place between different elements of the same company under the
agreement, the fact that the buyer and seller are related is not in itself grounds for
regarding the transaction price as unacceptable, what matters is that the relationship
does not influence the price. If the customs authorities have doubts on this point, they
must give the importer the opportunity to demonstrate that the price is fair, by
showing that it is close to a previously accepted price for identical or similar goods.
82
A. Method of Transaction Value of Identical Goods21
If and only if the customs authorities conclude, on the basis not only of Article 1
but also of interpretative notes, that the transaction price of the goods cannot be used
as the basis of valuation, they may move to the second valuation method. In applying
Article 2, the customs administration shall, wherever possible use a sale of identical
goods at the same commercial level and in substantially the same quantities as the
goods being valued. Where no such sale is found, a sale of identical goods that takes
place under any one of the following three conditions may be used:
� a sale at the same commercial level but in different quantities;
� a sale at a different commercial level but in substantially the same
quantities; or
� a sale at a different commercial level and in different quantities.
Having found a sale under anyone of these three conditions adjustments will
then be made, as the case may be, for
� quantity factors only;
� commercial level factors only; or
� both commercial level and quantity factors.
A condition for adjustment because of different commercial levels or different
quantities is that such adjustment, whether it leads to an increase or a decrease in the
value, be made only on the basis of demonstrated evidence that clearly establishes the
reasonableness and accuracy of the adjustments, e.g. valid price lists contain prices
21 Article 2.
83
referring to different levels or different quantities. If more than one price for identical
goods is found, the lowest of these prices must be used for valuation.
B. Method of Transaction Value of Similar Goods22
The third method, for use if the second cannot be used, is almost the same but
bases valuation on the transaction value of the mostly closely similar, rather than
identical goods. Similar goods need not be alike in all respects to the goods being
valued, but they will have like characteristics and component materials, which allow
them to perform the same functions and be commercially interchangeable, and will
have been produced in the same country (and normally by the same producer) as the
goods being valued. Once again, there are lengthy interpretative notes on such matters
as the adjustments that may have to be made to allow for the quantities or commercial
factors being different in the case of the sale of the similar goods from that of the goods
being valued.
C. Exception to Hierarchical Rule23
The sole exception to the strict hierarchy of valuation methods concerns the
fourth and fifth alternatives. Article 4 of the Agreement on Customs Valuation
provides that if the customs value of the imported goods cannot be determined under
the provisions of transaction value or similar or identical provisions than the customs
value shall be determined according to the provisions of Article 5 or when the customs
value cannot be determined under that Article, under the provisions of Article 6. But if
the importer so requests fifth method may be tried before the fourth.
22 Article 3.
23 Article 4.
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D. Method of Deductive Value24
Under the deductive value method, valuation is based on the resale price of the
goods being valued or similar goods sold in the same country of importation at or
about the same time to persons unrelated to the seller who has exported the goods.
The resources required for application of the deductive value method reflect the fact
that this method entails making appropriate deductions necessary to reduce the price
to relevant customs value at the point of importation or exportation as the case may be.
The profit and general expenses under this method should be taken as a whole.
This figure should be determined on the basis of information supplied by or on behalf
of the importer unless the importer’s figures are inconsistent with those obtained in
sales in the country of importation of imported goods of the same class or kind. Where
the importer’s figure are inconsistent with such figures, the amount for profit and
general expenses may be based upon relevant information other than that supplied by
or on behalf of the importer.
In determining either the commissions or the usual profits and general expenses,
the question whether certain goods are of the same class or kind as other goods must
be determined on a case by case basis by reference to the circumstances involved. Sales
in the country of importation of the narrowest group or range of imported goods of the
same class or kind, which includes the goods being valued, for which the necessary
information can be provided, should be examined. For the purpose of deductive
method, goods of the same class or kind includes goods imported from the same
country as the goods being valued as well as goods imported from other countries.
24 Article 5.
85
Deductions made for the value added by further processing shall be based on
objective and quantifiable data relating to the cost of such work. Accepted industry
formulas, recipes, method of construction and other industry practices would form the
basis of calculations. The deduction value would normally not be applicable when, as
a result of the further processing, the imported goods lose their identity.
E. Method of Computed Value25
In order to determine a computed value it is necessary to examine the costs of
producing the goods being valued and other information which has to be obtained
from outside the country of importation. In most of the cases the producer of the goods
will be outside the jurisdiction of the authorities of the country of importation. The use
of the computed value method is generally limited to those cases where the buyer and
seller are related and the producer is prepared to supply the authorities of the country
of importation the necessary costing and to provide facilities for any subsequent
verification which may be necessary.
F. Fall-back Method26
Only if none of the above five methods can be applied may the customs
authorities fall back on the other means of establishing the value of the goods being
imported. Article 7 of the Agreement requires that the value be determined ‘using
reasonable means consistent with’ the Agreement and GATT Article VII, and on the
basis of data available in the importing country.
Customs value shall not be determined under this method on the basis of—
25 Article 6 of the Agreement.
26 Ibid.
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(a) the selling price in the country of importation of goods produced in such
country;
(b) a system which provides for the acceptance for customs purposes of the
higher of two alternative values;
(c) the price of goods on the domestic market of the country of exportation;
(d) the cost of production other than computed values which have been
determined for identical or similar goods in accordance with the computed
value;
(e) the price of the goods for export to a country other than the country of
importation.
(f) minimum customs value; or
(g) arbitrary or fictitious value.
6. Guidelines on ‘Objective and Quantifiable Data’ and on Accounting
Standards27
The Customs Valuation Code’s preferred use of the actual transaction value
method is conditional on the availability of objective and quantifiable data from the
importer to substantiate additions required to be made under Article 8 of the code.
This means that even if an importer has truthfully declared the actual value of
imported goods, the value declared will not be acceptable to the customs authorities
under the actual transaction value method if no data have been submitted to
substantiate additions to the price included in the declared value. However, the code
27 Article 8.
87
provides no concrete and specific definition of the term ‘objective and quantifiable
data’. To ensure fairness and uniformity in administration, customs officials need to be
furnished with a guideline that sets out a practical definition on which they can rely in
decision making.
One approach of defining ‘objective and quantifiable data’ is to treat this
expression as meaning information sufficient to demonstrate the truth and accuracy of
the value declared by the importer. Even if an importer submit information which
tends to substantiate the basis for the declared value, however, a calculation of value
will not be acceptable to the customs administration under the actual transaction value
method if it is not prepared in accordance with generally accepted accounting
principles in the country of importation.
In other words we can say that, even if the declared value correspond to
‘objective and quantifiable’ evidence, it may nevertheless be regarded as an
‘inaccurate’ or ‘untrue’ value, unless the data in question conform to generally
accepted accounting principles, by which is meant rules and interpretations of
accounting established by recognized consensus of the accounting profession within
the county of importation at that particular time.
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7. Other Provisions
Other rules in the code concern the exchange rates to be based for currency
conversions involved in establishing customs value. Article 9 of the code provides that
the rate of exchange to be used should be duly published by the importation country
in respect of the period covered by such document of publication. Article 10 of the
Code further provides that all information which is confidential in nature shall be
treated confidential in strict sense of the term.
If, in the course of determining the customs value of the imported goods, it
becomes necessary to delay the final determination of such customs value, the
importer can withdraw the goods, if he/she can provide sufficient guarantee in the
form of surety.
8. Customs Valuation for Related-Party Transactions
One of the most difficult matters in customs valuation practice is how to
appraise dutiable value in transactions between related parties, especially in
international sales between different entities under the common control of a single
multinational enterprise. For the purpose of this code Article 15.4 provides that
following persons shall be deemed to be related only if—
(a) they are officers or directors of one another’s business;
(b) they are legally recognized partners in business;
(c) they are employer and employee;
(d) any person directly or indirectly owns, controls or holds five percent or more
of the outstanding voting stock or shares of both of them;
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(e) one of them directly or indirectly controls the other;
(f) both of them are directly or indirectly controlled by a third person;
(g) together they directly or indirectly control a third person;
(h) they are members of the same family.
The mere fact that the importers and exporter are related companies within the
meaning of Article 15.4 of the code doesn't in itself suffice for the customs
administration to reject the declared transaction value. Even though the customs
administration may presume or suspect that the relationship between the parties
probably influenced pricing, the burden of proof to demonstrate that the price is not an
‘arm’s-length’ value rests upon the customs administrations. In the event that the
customs administration has no objective evidence tending to prove that the
relationship influenced price, the importer may successfully challenge the valuation in
litigation and a court may summarily rule against the customs administration in the
absence of proof.
If any of the following elements is disclosed in the factual details of a related-
party transaction based on the information and documents submitted by the importer,
then there would be some reason to suspect that the relationship between the parties
had influenced the price:
-- the price is determined in a manner different from the ordinary way in which
prices are determined between unrelated parties;
-- the amount of profit or general selling expenses incurred by an importer in a
related-party transaction is considerably higher than in similar transactions
between unrelated parties; or
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-- the declared import price is uniformly low in comparison to prices observed
in ongoing transactions in the same items between unrelated parties.
However, there also exist situations in which a declared transaction value is
acceptable between related parties. This is the case when the importer can demonstrate
that the declared value closely approximates one of the following, taken at or about the
same time:
-- the transaction value in sales to unrelated parties in the same country of
importation of identical or similar goods;
-- the customs value of identical or similar goods as determined under the
deductive value method; or
-- the customs value of identical or similar goods under a computed value
method.
In applying the above tests, due account is to be taken of demonstrated
differences in commercial levels, in quantities, in the elements enumerated in Article 8
of the Code and in costs incurred by the seller for sales to unrelated parties which are
not incurred in sales to related parties.
9. Calculation of Profit and General Expenses
Calculation of an accurate figure for commissions, profit or general selling
expenses in the country of importation for goods of the same class or kind can pose
manifold problems for customs authorities. The Interpretative Notes to the Code
indicate that ‘sales of imported goods of the same class and kind should be examined
and clarifies that imported goods includes not only similar goods imported from the
same country as the goods under valuation, but also goods imported from third
91
countries. Such investigations are not easy to conduct. Therefore, customs
administration conduct the calculations based on a range of values rather than on
specific figures.
10. Royalties and License Fees
If the money paid for goods includes payment not only for goods themselves,
but also for a right that is closely related to the goods such that the additional payment
is a condition of importation, then the customs value will include all relevant
payments in the total price of the goods. The price actually paid or payable for goods
includes all payments or performances of value passing from the buyer to the seller.
Article 8.1(c) of the Code provides ‘royalties and license fees related to the
goods being valued that the buyer must pay, either directly or indirectly, as a
condition of sale of the goods being valued, to the extent that such royalties and fees
are not included in the price actually paid or payable.’
11. Burden of Proof
The allocation of the burden of proof between the customs administration and
importers is an important requirement, given that they have often been accused of
arbitrarily shifting the burden of proof to importers based on unreasonable
presumptions, abuse of discretion or ambiguous regulations. Once an importer has
met the burden of producing some evidence, it will be incumbent on the customs
administration to come forward with other evidence to rebut the submitted evidence.
The options available to a customs administration are —
-- to make no specific regulation regarding burden of proof, leaving it for
judicial determination in each case;
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-- to adopt provisions along the lines of GATT Ministerial Decision Regarding
Cases Where Administrations Have Reasons to Doubt the Truth or Accuracy
of the Declared Value;
-- to incorporate into the national customs law a strict provision suiting the
burden of proof in customs valuation cases to the importer.
12. Special Provisions for Developing Countries28
The economies of the developing countries are fundamentally different from
those of developed ones. The attitude of both to the Code differs, even though the aim
of the Code is to facilitate international trade in principle and to bring benefits
globally. The developing countries face many problems like shortages of foreign
exchange, substantial foreign debt, inadequate infrastructure, high import volumes
and excessively low level of exports.
Although developing countries recognize that in theory Code achieves a
balance between their interests and those of industrialized countries, they do not
believe that a balance is achieved in practice as well. Technically the Code which most
of the developing countries are not willing to administer are those concerned with
related parties, identical or similar goods, computed value and royalties and license
fees.
Although, the Agreement establishing WTO requires every country to accept all
multilateral agreements negotiated in the Uruguay Round, the Code provided the
developing countries a total period of five years to implement the provisions i.e. till 1
Jan, 2000. By the end of this period 51 developing countries had invoked the five year
delay period. In order to facilitate the change over to this code, the code calls on the
28 Article 20.
93
developed countries and international organizations like—World Customs
Organization to provide technical and training assistance in the preparation of
implementation measures.
In addition, the developing countries who were not the members to the Tokyo
Round Agreement can delay the application of the computed value methodology over
and above the period not exceeding three years following the application of all
provisions of this Agreement.
13. The GATT Ministerial Decision Regarding Cases Where Customs
Administration Have Reasons To Doubt The Truth Or Accuracy Of The Declared
Value
During the Uruguay Round negotiations, the concerns of developing countries
were given serious attention and their request that the burden of proof be shifted to
importers led to a compromise formulation on that issue which was adopted by the
Valuation Committee at the close of negotiations. This compromise subsequently was
embodied in the GATT Ministerial Decision Regarding Cases Where Customs
Administration Have Reasons to Doubt the Truth or Accuracy of the Declared Value.
This Decision recognizes that customs may need to request additional information
from importers when there is a reasonable basis for doubting a declaration and it
authorizes the rejection of the declared transaction value if this is not forthcoming or if
doubts persist after further information is produced.
Another positive aspect of the Decision is that it eliminates minimum values.
Some countries were employing certain ‘standard values’ or ‘minimum values’ in
order to make systematic adjustments of values irrespective of the price actually paid
for imported goods. To justify such practices, the need to combat fraud was invoked.
In fact as long as the burden of proof is shared by the importer, customs will be in a
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position to reject obvious cases of false invoicing and instead use the transaction value
of identical goods or similar goods, or other valuation methods authorized in the
Code.
When a declaration has been presented and a Where The Customs
Administration Has Reason To Doubt The Truth or Accuracy of the particulars or of
documents produced in support of this declaration, the customs administration may
ask the importer to provide further explanation, including documents or other
evidence, that the declared value represents the total amount actual by paid or payable
for the imported goods, adjusted in accordance with the provisions of Article 8 of the
Customs Valuation Agreement. If, after receiving further information, or in the
absence of a response, the customs administration still has reasonable doubts about the
truth or accuracy of the declared value, it may, bearing in mind the provisions of
Article 11 of the Customs Valuation Agreement be deemed that the customs value of
the imported goods cannot be determined under the provisions of Article 1 of the
Agreement. Before taking a final decision, the customs administration shall
communicate to the importer, in writing if requested, its grounds for doubting the
truth or accuracy of the particulars or documents produced and the importer shall be
given a reasonable opportunity to respond. When a final decision is made, the customs
administration shall communicate to the importer in writing its decision and the
grounds therefore.
14. Administration, Consultations and Dispute Settlement29
Like many other WTO agreements, the Customs Valuation Agreement is served
by a Committee established for the purpose. It is open to all WTO Members. A special
feature of the Code, however, carried over from the earlier Tokyo Round Code, is that
29 Part-II of the Agreement.
95
it also has a Technical Committee which operates outside the WTO. This Committee is
established within the World Customs Organization, with the task of ensuring that the
agreement is interpreted and applied in the same way by all WTO Members. This
involves studying specific problems that may arise, advising on solutions to them,
studying valuation laws, procedures and practices and giving advisory opinions.
The Dispute Settlement Understanding is applicable to consultations and
settlement of disputes under the code. If any member considers that any benefit under
the code is being nullified, it may consult the other members regarding it. The other
members have to oblige the complaining member sympathetic consideration. In the
event that a dispute nevertheless reaches the stage of being referred to a panel for
solution, the Technical committee may be asked to report on questions that require
technical considerations.
In US-Certain EC products case30 the Panel examined whether increased
bonding requirements imposed by US on certain products imported from the
European Communities were consistent with, among others, Article II of GATT 1994
and certain provisions in the DSU. The US put forward Article 13 of the Customs
Valuation Agreement as a defence, arguing “that the non-compliance of the European
Communities (with a certain DSB recommendation) created a risk, which allowed the
United States to have concerns over its ability to collect the full amount of duties which
might be due” and that the increased bonding requirements were consistent with that
Article. The Panel stated that in the present dispute, there is no disagreement between
the parties on the customs value of the EC listed imports. Article 13 of the Customs
Valuation Agreement allows for a guarantee system when there is uncertainty
30 United States – Import Measures on Certain Products from the European Communities,
Panel Report, WT/DS165/R and Add.1, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS165/AB/R.
96
regarding the customs value of the imported products, but is not concerned with the
level of tariff obligations as such. The Panel further states that Article 13 of the
Customs Valuation Agreement does not authorize changes in the applicable tariff
\levels between the moment the goods arrive at a US port of entry and a later date
once imports have entered the US market. The applicable tariff must be one in force on
the day of importation, the day the tariff is applied. In other words, Article 13 of the
Customs Valuation Agreement is of no relevance to the present dispute, the Panel
concluded. Therefore, the US defence was rejected by the DSB.
15. Reservations and Review of the Code
Any Member can declare certain reservations to code subject to the provisions
that such reservations cannot be entered into effect if the consent of other members has
not been taken earlier.31
The Technical Committee shall keep a vigil on the operation of the code. This
committee reviews annually the implementation and operation of the agreement
taking into account the objectives thereof. The Committee annually gives a report to
the Council for Trade in Goods regarding the developments during the whole year.
16. Custom Valuation: Experience with India
India played a key role during the Tokyo Round GATT negotiations by placing
a new proposal in September 1978, with the suggestion of transaction value for
valuation purposes. This proposal encouraged some other developing countries to
join the negotiations. However, many developed countries rejected the proposal as
they felt that it gave too much authority to the customs officials. As a result, Tokyo
Round was concluded in April 1979 without a multilateral agreement on customs
31 Article 21.
97
valuation but rather a plurilateral code that countries could opt into. India was one of
the signatories. However, India took rather long to implement this international
commitment. It was only in 1988 that the Customs Act 1962 was amended with effect
from August 16, 1988 to bring in elements of international commitment related to
transaction value for valuation purposes. It is also important to note that India has not
subscribed to pre-shipment Inspection (PSI) services. It is allowed only in cases of
metal scrap and such other imports which may pose security concerns. Pre-shipment
inspection is the practice of employing specialized private companies (or "independent
entities") to check shipment details - essentially the price, quantity and quality of
goods ordered overseas. This is followed in countries where customs departments are
not very strong.
Much before accessing to the WTO Agreement of Customs Valuation, India
accepted the concept of ‘transaction value’ as a primary method for valuation. It was
done as part of the GATT valuation implementation in August, 1988 itself. As part of
this, the customs department is bound to accept the value stated by the importer
through the invoice unless the department has additional information to substantiate
under invoicing. Some importers take advantage of this legal situation and undervalue
their imports with fake invoices knowing that customs authorities may not be able to
place them. As of now, it is reported to have a revenue loss of almost Rs. 100,000
million.5 In this context, related Uruguay Round ministerial decision gives customs
administrations the right to request for further information in cases where they have
reasons to doubt the accuracy of the declared value of imported goods.6 If the
administration maintains a reasonable doubt, despite any additional information, it
may be deemed that the customs value of the imported goods cannot be determined
on the basis of the declared value.
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However, the efforts by the Customs Department to minimize loss of revenue often
lead to situations which make the system slow, unpredictable and nontransparent.
This defeats the very “raison d’ etre” for trade facilitation. As would be clear from the
study, there are issues related to Indian traders, especially the small and medium size
companies facing constraints and similarly to the multinational companies in context
of transactions between related parties.
Similarly, there are cases of fraudulent re-invoicing in third countries, double
invoicing with the connivance of the foreign suppliers, false declaration of description,
quantity and quality of imported goods to suppress value, over-valuation of exempted
and low-rated imports to transfer hard currency abroad and overvaluation of exports
to get additional export incentives by the private sector Though implementation of
programmes like risk management system (RMS), accredited traders and valuation
corridors may help to a great extent, some supplementary efforts may make the system
more effective.
Institutional and Policy Framework
The Central Board of Excise and Customs (CBEC) is the key government agency
to overview policy planning and development of institutional infrastructure to support
it. It established the Directorate of Valuation (DOV) in 1997 for providing guidance to
the field staff and develops mechanisms so as to ensure uniform application of rules
and regulations for valuation purposes. DOV is headed by a Director General and is
based in Mumbai with two zonal offices in Delhi and Bangalore. The CBEC has also
delegated to DOV the customs valuation regarding work being done by India as part
of WCO. Thus DOV is effectively linked with international processes India is engaged
in. As part of its international mandate, DOV organized training courses for customs
officials from other developing countries.
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The major challenge before DOV is to ensure monitoring of those goods in
which valuation often comes up as an issue. In order to address this challenge
effectively, DOV has developed a network to gather information and feedback on the
international price movement of these commodities. DOV issues Valuation Guidelines
for the field offices. These are collected on the basis of information received from
agencies like Reuters, Metal Bulletin, PLATTS and different other sources. DOV has
also developed its own data bases as well.
In India, efforts have been made, as per the Article 11 of ACV, to have
institutional arrangements for ensuring rights of appeal. The Customs, Excise and
Service Tax Appellate Tribunal (CESTAT), formerly known as Customs, Excise & Gold
(Control) Appellate Tribunal (in short CEGAT), was established in 1982. Initially, first
appeal may be made at the customs department itself followed by the option for the
tribunal. The cases may also go to public judicial system at appropriate levels.
Recently India officially launched a country wide Accredited Clients Programme
(ACP) and RMS for importers. Under the ACP, regular importers with a reputation of
prompt compliance would be accredited under the scheme. This accreditation would
secure them assured facilitation at major customs ports throughout the country. The
trading community would be able to attempt self assessment and there would be no
need for examination by the customs. This may help in assuring of quick delivery of
their imported consignments. It would help importers in terms of reducing paper
work besides reducing transaction cost. This may also help in minimizing the
constraints faced on the front of valuation. Declaration of Bills of Entry and the Import
General Manifest (IGM) filed electronically in the ICES (Indian Customs EDI System)
either through the service centre or through the Indian Customs and Excise Gate Way
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is forwarded to the system. The RMS then processes the data in the Bill of Entry and
the IGM and generates an electronic output for the ICES. This output will determine
whether the Bill of Entry will be taken up for action (appraisement or examination, or
both, by the officers) or such self assessed bill is given out of charge directly - after
duty payment but without assessment and examination. The RMS which was
operational earlier at a limited level has now been launched by the Finance Minister at
the national level.
Changing Policy Regime
After Independence in 1947, India revised her customs valuation provisions,
particularly the Sea Customs Act of 1878, to bring it in conformity with GATT
provisions. The Sea Customs Act of 1878 was based on real value. This was defined as
the wholesale price for which like goods are capable of being sold at the time and place
of importation (excluding duties payable). The Sea Customs Act also contained
provisions for taking over the imported goods by Government on payment of an
amount equal to declared real value (Section 32). The changes in this act were made on
the basis of recommendations from Customs Reorganization Committee 1958-59,
which led to the enactment of Customs Act, 1962. The provisions of this were in
accordance with Article VII of GATT, which helped in standardizing various
procedures, at par with other countries, for determining value and laid down certain
principles so as to avoid fixing of arbitrary or fictitious values. The system was based
on actual value of imported goods. In this, even the values of goods of notional origin
were also ruled out. The provisions and the price was the sole consideration for sale.
The rules were notified through Customs Valuation Rule 1963.
As part of India’s commitment at the Tokyo Round Agreement on Customs Valuation,
the Customs Act 1962 was subsequently amended and the Customs Valuation
(Determination of Price of Imported Goods) Rules, 1988 were implemented, which
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provided scope for basing the valuation exercise on the basis of transaction value. The
new valuation rules of 1988 largely reflected provision of Article VII of General
Agreements on Tariffs and Trade, 1994 (WTO valuation code). The Customs Valuation
Rules, 1988, lays down six methods for the valuation of imported goods. The primary
basis for valuation is the “Transaction Value”. However, it is subject to adjustment by
certain Valuation Factors (Rule 9). There are also certain conditions for the transaction
value method to be applicable (sub-rule 2 of Rule 4). In certain situations, the Customs
authorities could reject the declared value (transaction value method), if the truth or
accuracy of the declaration is reasonably suspected (Rule 10 A). In all such cases where
the transaction value method is not applied, goods shall be valued by applying the
subsequent methods in a strictly hierarchical order (Rule 3). These methods are
summarized in context of Indian Customs Act (1988) as follows:
Compatibility in GATT Valuation Methods and Indian Customs Act (1988)
Methods : Indian Act Provisions
(a) Method 1: The transaction value method Rule 4
(b) Method 2: The transaction value of identical goods Rule 5
(c) Method 3: The transaction value of similar goods Rule 6
(d) Method 4: The deductive method Rule 7
(e) Method 5: The computed value method Rule 7A
(f) Method 6: The fall-back method Rule 8
Since the major switching over from an earlier system of valuation to a new regime in
1988 there were few amendments in the Act. These amendments were made in the
subsequent years of 1989, 1990 and 1991 to bring in measures which provided
maneuvering space to the Customs Department. In the 1990 amendment it was
introduced that there would be a requirement for production of manufacturers’
invoice at the time of valuation. This was vehemently opposed by the industry which
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led to another amendment (1991) only to make it conditional depending upon
requirements from customs department.
After India signed the Marrakech Agreement for establishment of WTO, certain more
amendments were made in the Customs Act (1988). An amendment was made in 1998
to enable the bringing in of the decision 6.1 of Uruguay Round Ministerial Declaration
to provide discretionary powers to the customs authorities if they are not convinced
with the information provided. In 1995 the rules were amended to introduce computed
value method. The Customs Valuation Rules, 1988 were again amended through a
notification in September 20001. This amendment again provided arbitrary and
discretionary powers to the customs department.14 The amendment covered collection
of additional duty of customs based on maximum retail price for the notified items on
which domestic excise duty is levied on a similar basis. It also proposed certain
linguistic changes in Article VII of GATT.
Institutional Infrastructure
In light of increasing global integration of Indian business several institutional
initiatives have been launched to provide policy support and facilitate work for
customs valuation. The Directorate of Valuation has launched several initiatives like
the establishment of National Import Data Base (NIDB), Central Registry Database
(CRD), etc. DOV has also launched a monthly bulletin titled, ‘Valuation Bulletin’
incorporating all value related information, including international price trends of
important commodities and market intelligence reports from various sources. This is
published and distributed to all field offices in the customs department. The Bulletin is
basically for officers in the field, as an important source of information on valuation
questions in their day-to-day assessment work. Apart from this, DOV also launched
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specific studies on select commodities depending upon their sensitivity for domestic
market. Some of the initiatives mentioned above are being discussed herewith.
National Import Data Base (NIDB)
The NIDB was launched to collect and analyze data for goods imported at almost all
the customs stations in India. The idea was to provide instant access to the combined
data duly analyzed by the DOV so as to check under valuation and valuation frauds.15
This initiative has become possible since most of the major customs points are now
linked with electronic data processing system (EDI). The required data is retrieved by
special software and transmitted to a central server in the Valuation Directorate
through a dedicated Intranet called ICENET. In case of non-EDI stations, the required
data is sent to the Valuation Directorate via email. This data is analyzed on a weekly
basis in DOV with the help of intelligent software packages.
The analyzed data is transmitted to all customs stations every week by
electronic means, i.e. via ICENET to major customs stations and via email to other
stations. Weekly transmissions are consolidated at Custom stations and stored in MS
access format with easy search and retrieval facilities. This data is made available to
assessing officers at custom stations on LAN. When the declared value is found to be
below 10 per cent the weighted average, the consignment is flagged as an outlier.
Special Valuation Branch (SVB)
The Special Valuation Branch was established to deal with specialized
investigation of transactions involving special relationships and certain special
features. It also looks into technical collaborations and texts of joint venture
agreements etc. It has its branches located at four major custom houses viz. Chennai,
Calcutta, Delhi and Mumbai. Any decision taken in respect of a particular case in any
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of these major custom houses is conveyed to all other custom houses by the SVBs
which have all India jurisdiction and hence on line communication with all Custom
Stations.
The order issued by the SVB remains in operation for a period of 3 years. The
order by the SVB is based on the replies/documents furnished by the importer. If there
is any suppression of fact or mis-declaration on the part of importer, necessary penal
action taken separately in accordance with the provisions of law. If the importer is
having continuous imports over a period of time extending beyond 3 years, he has to
file replies and documents at least 3 months before the completion of 3 years, so as to
take up the renewal of the case. In all cases where the importer is aggrieved by the
order passed by the SVB, he may file an appeal to Commissioner of Customs (Appeals)
against that order.
Central Registry Database (CRD)
DOV has established a Central Registry Database working as part of Special
Valuation Branch (SVB) cases relating to importation involving complex valuation
issues such as related party imports, cases involving payment of royalties, license fees,
supply of materials and services by the importer, etc. The CRD is made available on
the Directorate’s web site for reference by departmental officers in their day-to-day
assessment work.
Valuation Risk Assessment Module (VRAM)
In the context of the development of a Risk Management System (RMS) for import
cargo clearance, the Directorate has joined hands with the national Risk Management
Team for devising the strategy for valuation risk assessment and control. On the basis
of discussions, the valuation component of the RMS, namely, Valuation Risk
Assessment Module (VRAM) has been designed. It is composed of three parts. The
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first part is a ‘Valuation Corridor’ consisting of a database of very highly sensitive
Commodities. Most of them have permissible value band defined for allowing
clearance without intervention. Any consignment having declared value below the
lower limit of value band, will be directed for assessment by officers. The second part
of the valuation component of the RMS is Valuation Alerts, which are issued by
DGOV. If any importer imports the commodity covered by the list of Valuation Alerts,
then the consignment is sent to an officer for verification. The third part is that of poor
data quality. If the importer declares unusual Unit Quantity Code (UQC) that is not
normally used UQC (SQC) then the consignment is sent for assessment.
Export Commodity Data Base (ECDB)
The Directorate has initiated work on the development of an Export
Commodity Data Base (ECDB), which will focus on the valuation of export goods. This
is primarily to check the possibility of over valuation of export goods, a mechanism
followed by unscrupulous exporters to claim high level of export incentives under
different schemes based on export value. The export data will be compiled on a daily
basis in the electronic form from Customs stations that are linked by the dedicated
Customs Network (ICENET). The data will be extracted in a predetermined format
from all the ICES locations, transmitted via ICENET and merged at DOV into a single
data source. The data will be analyzed by special software on weekly basis to provide
unit values, averages, percentage deviations, etc. so that it could be used as a real time
source of information for valuation by the field based assessing officers. The analyzed
files are transmitted to all field formations through ICENET for building up local
database for utilization by officers.
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Experience with Agreement on Customs Valuation
The Indian experience with the implementation of ACV is rather mix. Though, India
has largely adopted Article VII of GATT, it has made certain variations for ensuring
smooth implementation of customs valuation agreement. These variations include like
for instance, adding of method 7 for Settlement of Dispute, in customs valuation under
Rule 11 of Indian Customs Valuation Rules. Similarly, Rule 10A of Customs Valuation
Rules was introduced to provide a ground for rejection of the declared value, based on
the existence of reasons to doubt so that Customs Authority could have a fair
determination of customs value. This provision came from Decision 6.1 of Uruguay
Round WTO Ministerial Declaration. According to this, burden of proof is shifted to
the importer.
However, there are several judicial pronouncements in India, which have
directed the customs department to exercise restrain in application of Rule 10A. In fact
there is a pattern in the promulgation of amendments in the Customs Valuation Rules
of 1988 and putting in of new rules and the valuation related rulings by the judicial
delivery system. The Rule 10A itself was outcome of a judicial decision. As would be
clear in the section on private sector perception of customs valuation the several legal
judgments have instructed the Department to follow ‘transaction value’ as the first
basis for valuation. The Eicher Motor case (2000) became a turning point in this regard
(see Box below.)
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Box: The Eicher Tractor Case
The Supreme Court of India (SCI) in their judgment on Eicher Tractors Limited vs.
Commissioner of Customs, Mumbai, case held that, unless the price actually paid for a
particular transaction falls within the exceptions laid down, customs authorities are bound
to charge duty on the transaction value (TV). The case is an interesting example
demonstrating how customs department may implement provisions which completely
overlook fundamental requirements for trade facilitation. In this case, the Eicher Tractors
Limited imported tailor made bearings manufactured in 1989 from Japan. Part of the
consignment was rejected and later was imported in 1993. Since the Japanese exporter could
not sell this product (being tailor made to specific requirements) to any other firm, the
transaction was at the one-third of the 1989 price. The customs department rejected the TV.
Eventually, SCI while ordering of acceptance of TV directed that the price of imported
goods is to be determined in accordance with time and place of importation and absence of
special circumstances. After the judgment the Indian government amended the Customs
Valuation Rule in 2001 whereby the sales below cost is no more specifically excluded from
being valued on the basis of transaction value.
Source: Based on Excise Law Time (ELT [122] 2000).
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India & Customs Duty Rationalization
The underlying philosophy of reduction in tariffs by Govt. of India to promote
competitiveness in the Indian industry. There is a feeling in Government circles that
high tariff rates had the effect of creating a high cost industrial structure.
The Finance Act, 1993, made a significant simplification in the import tariff by
merging auxiliary duty with basic duty, and also by reducing the maximum rate of
import duty from 110 per cent to 85 per cent. The peak rate of import duty was further
reduced from 85 per cent to 65 per cent by the Finance Act, 1994.
Continuing the process of reducing the high level of protection to domestic
industry to foster competition and promote efficiency, the peak rate of import duty
was reduced from 65 per cent to 50 per cent in 1995, and further down to 40 per sent in
the 1997-98 budget.
A special customs duty of 2 per cent was imposed in the 1996-97 budget and a
further special customs duty of 3 per cent was imposed on certain items in 1997-98. In
other words, special customs duty of 5 per cent was in force for a period valid till
31.3.1999.
However, in another move the Finance Minister imposed a uniform surcharge
of 10 per cent on all commodities excluding the following categories: (a) crude oil and
petroleum products, (b) items attracting 40 per cent rate of basic duty, (c) certain
GATT-bound items and (d) gold and silver.
In other words, the imposition of surcharge raised the basic rate by 10 per cent.
For example, basic rate of 5 per cent became 5.5 per cent and 15 per cent became 16.5
per cent.
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Still further, the Finance Minister reduced the peak rate of basic customs duty
from 40 per cent to 35 per cent in his 2000-01 budget, thereby reducing the total
number of customs duty rates from 5 to 4, i.e. 35 per cent, 25 per cent, 15 per cent and 5
per cent. The surcharge of 10 per cent imposed in the 1999-2000 budget became
applicable to new peak rate of 35 per cent. It is noteworthy that apart from the basic
customs duty, countervailing duty equivalent to excise duty (16 per cent) is also
imposed, making the maximum rate of customs duty to around 50 per cent.
Committed to a calibrated integration of Indian economy with the world
economy, further phasing down of our customs duties to ASEAN levels was
undertaken in the Budget for the year 1999-2000. However, special considerations to
raise revenue and the fact that in a year of exceptional turbulence and uncertainty in
the world economy, the Indian industry should be cushioned against unusual surges
of competitive pressure from imports was kept in mind.
After careful examination of various possibilities, and close interaction with the
apex organizations of Commerce and Industry, it was decided to reduce the existing 7
major ad-valorem rates of customs duty to 5 basic rates. The new rates announced
were:
- 5 per cent — which will remain unchanged;
- 15 per cent by substituting the existing 10 per cent rate;
- 25 per cent by merging the 20 per cent and 25 per cent rates;
- 35 per cent by merging the 30 per cent and 35 per cent rates
- 40 per cent - which will remain unchanged.
Taking all factors into consideration, the Budget 2000-01, reduced the peak rate
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of basic customs duty from 40 per cent to 35 per cent, thereby reducing the total
number of customs duty rates from 5 to 4, i.e. 35 per cent, 25 per cent, 15 per cent and 5
per cent.
The surcharge of 10 per cent levied due to revenue considerations, also applied
to the new peak rate of 35 per cent. Crude oil and petroleum products, certain WTO
bound items and gold and silver continued to be exempt.
In the Budget for the year 2001-2002, no change in tariff or slab rate of customs
duty was announced. However, the surcharge of 10 per cent was discontinued. With
this, peak level of customs duty declined marginally from 38.5 per cent to 35 per cent.
Customs duty on a few items were withdrawn and were imposed with a nominal duty
of 5 per cent.
The Finance Minister in his budget for 2002-03, announced that the government
would move progressively to reduce to peak rate of customs duty to 20 per cent within
three years. An Inter-Ministerial Working Group set up for the purpose suggested a
road map for this starting with the budget. It recommended that by 2004-05, there
would be only two basic rates of customs duties, namely, 10 per cent covering
generally raw material, intermediates and components and 20 per cent covering
generally final products. In accordance with the road map, the peak rate of customs
duty was reduced from 35 per cent to 30 per cent.
In line with last budget, in 2003-04, the peak rate of customs duty was reduced
from 30 per cent to 25 per cent, excluding agriculture and dairy products.
The peak rate of duty on non agricultural products was reduced to 20% in the 2004-
05 Budget. However, there were a number of products where the duties were reduced
to 15%.
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In the 2005-06 Budget, the peak customs duty on industrial products was
reduced from 20% to 15%. A special additional customs duty of 4% was also
introduced to countervail the domestic levies such as VAT, sales tax, entry tax etc.
The 2006-07 Budget saw the peak customs duty on industrial goods reduced
from 15% to 12.5% with a few exceptions.
In the 2007-08 Budget, the peak customs duty on industrial goods was reduced
from 12.5% to 10%.
There was no change in the peak duty of 10% on industrial goods in the 2008-09
Budget and other changes were only marginal.
The 2009-10 Budget saw no change in the peak industrial goods duty of 10%
with marginal changes in duty on some petroleum products, capital goods etc.
In the 2010-11 Budget, the peak rate of customs duty was maintained at 10%
with marginal changes in duty of certain tariff lines among petroleum products,
precious metals etc.
To recapitulate, radical reforms have been introduced in the Indian customs
tariff between 1991 and 2010. These reforms were necessary because the customs tariff
had become, over the years, very complicated in terms of multiple rates, innumerable
exemptions, excessive controls, and elaborate procedures. These infirmities of the
customs tariff often led to delays, harassment, corruption, and litigation. Moreover,
rationalization and simplification of the customs duties was needed to move towards a
market economy, freedom of trade, and opening up the Indian economy to the outside
world. The major changes included the following: (a) the peak rate of import duty was
reduced from 200 per cent to 10 per cent, (b) average rate of import duty was scaled
down from 50 per cent to 9 per cent, (c) import duty on capital goods was brought
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down from 85 per cent to 7.5% per cent.
9. Conclusion
The importance of customs valuation practice in facilitating international trade
and in coping with violations of law by traders should not be underestimated.
Currently, a very large number of countries have implemented the Code. For those
developing countries which have not adopted code there is an urgent need for
formation of a task force to pursue the implementation of the Code on the domestic
level. Such a task force should be composed of experts with substantial experience in
the relevant fields, which is law, accounting and international trade practices. The
developing countries should also recognize that the administration of customs
valuation is an important area with a potentially major impact on the process of
importation. It is also a domain of significance for policing illegal activities of traders.
Thus, the government ought to give due priority to this aspect of customs
administration, even if collection of import duties does not constitute a primary source
of state revenue and even if implementation of the code is expected to gradually
diminish the total revenues from import duties. In Indian context, while the Customs
Valuation Agreement has been applied since 1988, the traders still identify the disputes
on customs valuation and major trade facilitation issue. Use of modern infrastructure
like customs database by a specialized agency like Directorate of Valuation within the
Central Board of Excise and customs has achieve considerable success in combating
the measure of undervaluation and ensuring adoption of uniform values at different
customs entry ports. However field level irritants to application of customs valuation
system still need to be addressed to the full satisfaction of all stakeholders.
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Agreement on Import-Licensing Procedures
1. Introduction
Import licenses, like origin rules, are a tool for applying trade policies. The
Agreement on Import Licensing Procedures is a straightforward set of principles and
detailed rules intended to prevent licensing from being an obstacle to trade in itself. It
is not a major innovation; rather it is in fact a revised version of limited membership
code negotiated in the 1970s. It has been usefully improved and has gained in
importance because, as one of the multilateral agreements annexed to the WTO, its
obligations apply to all WTO Members. The Agreement establishes disciplines on
users of import licensing systems to ensure that the procedures do not by themselves
restrict trade. Rather it aims to simplify, clarify and minimize the administrative
requirements necessary to obtain import licenses.
The Agreement on Import Licensing Procedures has been framed in order to
further the objectives of the GATT 1994, taking into account the needs of the
developing country members. The Agreement recognized the paramount importance
of automatic import licensing so that such licensing should not be used to restrict
trade. The framers were convinced that import licensing should be implemented in a
purely transparent and predictable manner. They were desirous to simplify and bring
transparency to the administrative procedures and practices used in international
trade. They tried to ensure that fair and equitable application and administration of
such procedures and practices be established. The Agreement ensures that procedures
for import licensing be applied purely in a neutral and non-discriminatory manner.
Governments generally use import licensing for one of the two purposes: to
administer quantitative or other import restrictions, or as a means only of keeping
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track of imports, usually for statistical purposes. Licenses for the first purpose are
classified as non-automatic, because they will only be issued if an applicant is allocated
a part of whatever import quota is available. Issuance of the second category of
licenses is normally automatic. The Agreement contains general provisions that apply
to both kinds of import licensing, as well as provisions that apply specifically to non-
automatic or automatic licensing.
2. General Provisions
Article 1 of the Import Licensing Procedures provides for the general provisions
regarding it. The provisions seek to reduce the scope for discrimination or
administrative discretion in the application of both kinds of licensing. Rules are to be
neutral in application and administered fairly and equitably. All rules, as well as
relevant information about who is eligible to apply for a license, where the application
should be made, and which goods are subject to licensing must, whenever practicable
be published by members 21 days prior to the effective date of the requirement, and in
all events not later than the effective date. At least 21 days’ notice should be given of
changes. License application and renewal forms should be kept simple. Only such
documents and information are demanded which are really required. The application
and renewal procedures are made very simple. Applicants are normally provided 21
days or in some case more to respond if there is a closing date. They should consult or
approach only one administrative body, but it should not in any case exceed 3.
Applications are not to be refused for minor errors of documentation. It is also
provided that there should be no undue penalties for minor mistakes and omissions.
Licensed imports are to be accepted even if they show minor variations from the
license, in value, quantity or weight, provided these variations are consistent with
normal commercial practices. No penalty greater than necessary to serve merely as a
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warning is to be imposed in respect of any omission or mistake in documents if they
have been made without fraudulent intent or gross negligence.
The foreign exchange necessary to pay for licensed imports must be made
available to license holders on the same basis as for goods which need no license. With
regard to security exceptions the Agreement on Import Licensing provides that
provisions of Article XXI of GATT will apply. The Agreement does not provide for
member countries to disclose confidential information which impedes law
enforcement or otherwise would be contrary to the public interest or would be
prejudicial to the legitimate commercial interests of the particular enterprise. It does
not matter whether these enterprises are public or private. The Agreement will apply
equally to both the enterprises. The Agreement will not discriminate between the two.
3. Automatic Import Licensing
Automatic Import Licensing has been defined in Article 2 of the Agreement. It is
defined as where approval of the application is granted in all cases and there is no
restrictive effect on trade. It is acceptable ‘‘whenever other appropriate procedures are
not available and as long as its underlying administrative purposes cannot be achieved
in a more appropriate way.’’
However, automatic import licensing escapes the tighter rules governing non-
automatic licensing only if it meets the following qualifying conditions:
� any person, firm or institution which fulfill the legal requirements of
the importing member for engaging in import operations involving
products subject to automatic licensing is equally eligible to apply for
and to obtain import licenses;
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� applications for licenses must be acceptable on any working day
before the goods are cleared through customs;
� applications in due form must be approved either immediately or
within 10 working days.
Developing countries which were not signatories of the earlier code are given
up to two years from becoming a WTO Member to meet the last two above
requirements.
Thus, according to the provisions of the Agreement the members recognise that
automatic licensing is necessary whenever other appropriate procedures are not
available. It can be given as long as the circumstances which give rise to its
introduction prevail and as long as its underlying administrative purposes cannot be
achieved in a more appropriate way.
4. Non-Automatic Import Licensing
The Agreement on Import Licensing defines non-automatic import licensing as
licensing which does not fall within the definition contained in Paragraph I of Article 2
of the Agreement. In other words we can say that the licensing which is not automatic
will be called non-automatic licensing. The central requirement under the agreement is
that such licensing shall not restrict or distort trade any further than the measures it
applies. The procedures under non-automatic licensing must correspond in scope and
duration to the measure they are used to implement. It should not be in any manner
more burdensome administratively, than what is absolutely necessary to administer
the measure.
Enough information must be published for traders to know the basis on which
licenses are given. The governments with a trade interest have the right to ask for
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detailed information about how licenses have been distributed and about trade in the
concerned products. If the members are administering import quotas, information
must be published about the size or value of the quotas, and the dates to which they
apply. If the quotas are allocated among supplying countries, all interested supplying
members must be informed, and the requirement of publication also applies. In case of
early opening of quota, the information must be published in such a manner as to
enable governments and traders to become acquainted with them.
Any person, firm or institution which fulfills the legal and administrative
requirements is equally eligible to apply and to be considered for a license. If the
licence has not been given, the person, firm or institution has a right to appeal or
review. The appeal or review shall be heard in accordance with the domestic
legislation or procedures of the importing member. The period for processing the
application will be applied on the basis of first-come first served basis. It must be
cleared within 30 days of the filling of the application and in no case more than 60 days
if all the applications are taken up the consideration simultaneously.
The Agreement provides that the validity of the license shall be for a reasonable
period. It cannot be so short as to preclude imports. The period of the validity of the
license must not preclude imports from distant imports, except in special cases where
imports are necessary to meet unforeseen short-term requirements.
In administering quotas, the members must not prevent importation from being
effected in accordance with the issued licenses. The members are directed by the
Agreement not to discourage the full utilization of quotas. In issuing licenses, the
members can take into account the desirability of issuing licenses for products in
economic quantities. While issuing licenses, the members can consider the import
performances of the applicant. In this matter the applicant’s past performances can be
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seen before issuing a license. If the licenses have
not been used fully, members can examine the reasons for
it and take into account these reasons before issuing any new licenses. Consideration
of new importers and their desirability can be the factors which can be examined
before allocating the licenses. Special consideration should be given to those importers
importing products originating in developing country members and in particular, the
least developed country members.
In the case of quotas administered through licenses which are not allocated
among supplying countries, license holders are free to choose the source of imports. In
the case of quotas allocated among supplying countries, the license shall clearly
stipulate the country or countries.
5. No Transition Period
The Agreement on Import Licensing Procedures has no transition period. It
came into full effect immediately upon coming into the force of unaguay Round
Agreement in 1995. Only those developing countries were conferred two years extra
time that were not party to the earlier code negotiated during 1970.
6. Committee on Import Licensing
The Agreement on Import Licensing provides for the establishment of a
committee known as the Committee on Import Licensing. This committee consists of
representatives of each of the members. The committee has been empowered to elect
its own chairman and vice-chairman. The committee meets as and when it is
necessary for the purpose of affording members the opportunity of consulting on any
matters relating to the operation of this Agreement or for the furtherance of the
objectives of the Agreement.
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7. Notification of Changed Rules
Article 5 of the Import Licensing Procedure provides that any new or changed
import licensing procedures have to be reported within 60 days of publication. This
information regarding import licensing procedures includes many other things like list
of products, information on eligibility, the administrative bodies which seeks
applications, indication whether the licensing procedure is automatic or non-
automatic, the expected duration of the licensing procedure, etc. In case of automatic
import licensing procedures the notification must contain their administrative purpose
and in case of non-automatic procedures, the indication of the measure which is being
implemented through the licensing procedure. The members are obliged to notify the
committee, the information the publication of which is required under paragraph 4 of
Article 1 of the Agreement.
Any interested member who considers that another member has not been
notified of the institution of licensing procedure or changes, may bring the matter to
the attention of other members. If notification is not made thereafter also, a member
can notify the licensing procedure or the changes therein. This notification can also
include all relevant and available information. This is called a system of reverse
notification which is a unique feature of this Agreement. However it has not yet been
used by any Member country.
8. Consultation and Dispute Settlement
Article 6 of the Agreement on Import Licensing Procedures provides that any
consultation and the settlement of disputes with respect to any matter which affects
the operation of the Agreement shall be decided, subject to the provisions of Article
XXII and XXIII of GATT 1994 which has been elaborated and applied by the Dispute
Settlement Understanding.
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9. Review of the Implementation and Operation of Agreement
The Committee on Import Licensing which composes of the representatives of
each of the members, has been empowered to review the implementation and
operation of the Agreement, at least once in every two years, taking into account the
objectives and the rights and obligations mentioned in the Agreement. For the review
of the workings of the Agreement, the Secretariat prepares the factual report based on
the responses of the annual questionnaire on import licensing procedures and other
relevant information which is available to it. The report works more like a synopsis
containing the information and in particular indicating the changes or developments
during the period under review. Members are under an obligation to complete the
annual questionnaire on import licensing procedures promptly and in full.
Subsequently, the Committee on Import Licensing reports to the Council for Trade in
Goods of the developments that occurred during the period of such review.
10. Reservations to the Agreement
Article 8 of the Agreement on Import Licensing Procedures provides for the
declaration of reservations by the members to the Agreement. But this does not mean
that the members are having an absolute right to declare their reservations on any of
the provisions of the Agreement. Reservations to any of the provisions of the
Agreement cannot be entered into without the consent of the other members of the
Agreement.
Once entered into this Agreement, every member must ensure that its law,
regulations and administrative procedures are in conformity with the provisions of the
Agreement. Any changes made to the laws, regulations and administrative procedures
relating to the Agreement must be brought to the notice of the Committee on Import
Licensing and this includes the administration of such laws and regulations also.
121
11. India’s Position
India has progressively liberalized imports by removing quantitative
restrictions maintained under the balance of payments cover. From the national
perspective, the lifting of these restrictions has been of far reaching significance. The
domestic industry is still going through the process of adjusting to the new situations.
QRs have been removed in phased manner by the Govt. of India. These items are
classified according to ITC (HS) classification at the 8-digit level. The Special Import
License (SIL) Scheme has also been discontinued. Now restrictions are still in force
only for those items as permissible under GATT Articles XX and XXI on the grounds
such as security, health and moral conduct.32
12. Specific Trade Concern
In 2009-10, US raised the issue of India’s licensing procedure for the imports of
boric acid for non insecticidal use. The core of the concern was the rationale for having
an import licensing procedure which the US alleges to be non automatic for import of
boric acid for non insecticidal use.
32 WT/TPR/G/100
122
Bibliography
Books, Articles and Cases
1. Legal text of the Agreement on Import-Licensing Procedures.
2. Guide to the Uruguay Round Agreements, The WTO Secretariat, Kluwer Law
International. The Hague, London, Boston, pp. 121-123, 1999.
3. John Croome, Reshaping the World Trading System—A History of the
Uruguay Round, Kluwer Law International. The Hague, London, Boston, pp.
73, 182, 1999.
4. Konstantinos Adamantopoulos (ed). An Anatomy of the World Trade
Organisation Kluwer Law International, London, The Hague, Boston, pp. 17.
5. Mitsuo Matsushita, Thomas J. Schoenbaum and Petros C. Mavroidis, The
World Trade Organisation—Law Practice, and Policy, pp. 128-132. The Oxford
University Press, 2003.
6. European Communities—Mesaures Affecting the Importation of Certain
Poultry Products, Panel Report, WT/DS69/R, adopted 23 July 1998, as
modified by the Appellate Body Report, WT/DS69/AB/R, DSR 1998:V.
7. European Communities—Regime for the Import, Sale and Distribution of
Bananas, Panel Report, WTDS 27/R/ [...], adopted 25 September 1997, as
modified by the Appellate Body Report, WT/DS27/ABR, DSR 1997: II.
8. Canada—Measures Affecting the Importation of Milk and the Exportation of
Dairy Products, Panel Report, WT/DS103/R, WTDS113/R, adopted 27 October,
123
1999, as modified by the Appellate Body Report, WT/DS103AB/R and Corr. 1,
WT/DS113/AB?R and Corr. 1.
9. India—Quantitative Restrictions on Imports of Agricultural, Textile and
Industrial Products, Panel Report, WT/DS90/R, adopted 22 September 1999, as
upheld by the Appellate Body Report, WT/DS90/AB/R, DSR 1999:V.
10. Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Panel
Report, WT/DS161R, WT/Ds169/R, adopted 10 January 2001, as modified by
the Appellate Body Report, WT/DS161AB/R, WT/DS169/AB/R.