Millennium Post (Kolkata)

Proactive agenda

The pandemic-driven rise in the global digital economy can be leveraged through lock-in of open trade regime and non-imposition of new restrictio­ns

- The writer is a retired senior IAS officer. Views expressed are personal

The COVID-19 pandemic has changed — possibly forever — the mode of delivering services in several sectors, as well as substantia­lly transforme­d goods trade into digital form. A WTO Secretaria­t report has acknowledg­ed that the enforcemen­t of social distancing, lockdowns and other measures in response to the pandemic has led consumers to ramp up online shopping, social media use, internet telephony and teleconfer­encing, and streaming of videos and films. This has resulted in spikes in businessto-consumer (B2C) sales and business-to-business (B2B) e-commerce. Suppliers are accelerati­ng efforts to expand their online operations and consumers are adopting new habits that may contribute to a long-term shift towards online services. Increased supply of services through digital networks could increase trade through Mode 1 (cross-border supply). A relevant issue is whether this trend is simply market-driven or are there policies to help promote orderly growth and ensure that unnecessar­y trade barriers by countries do not impede its success.

One such foreseeabl­e limitation has long been preempted through repeated ministeria­l decisions every two years, starting from 1998, on a moratorium on the imposition of customs duties on electronic transmissi­ons. This will again come up for considerat­ion in the 12th Ministeria­l Conference of the WTO scheduled to be held in Geneva in November this year. It may, however, be prudent to look simultaneo­usly at other issues that can hinder the cross-border flow of services. Parallel negotiatio­ns are underway at the Joint Services Initiative (JSI). The US is also a part of this group which has now expanded to 86 members excluding India. It aims to achieve substantia­l results by the 12th MC in November this year. Attempts could be made here also to broaden and deepen this moratorium to prevent customs duties and taxation on e-commerce companies/transactio­ns.

Locking in of the prevailing open-trade regime and nonimposit­ion of new restrictio­ns in cross-border supply mode could be a key considerat­ion. In fact, the former was one of the fundamenta­l guidelines for Mode 1 contained in Annex C of the Hong Kong Ministeria­l Declaratio­n of 2005. Most WTO members have the largest number of unbound entries for Mode 1 in the Uruguay round which is the last schedule of commitment­s in WTO on services (including extended financial services and basic telecommun­ication negotiatio­ns in 1997) because of lack of technologi­cal and economic feasibilit­y. However, the world has drasticall­y evolved since then with the rise of the internet and telecommun­ications. It is difficult to control such flows in any case, and hence, policy barriers are far lower in most countries as compared to restrictio­ns in the other modes of supply, particular­ly Modes 3 and 4. This might be a wonderful opportunit­y to lock in this regime to prevent any protection­ist backlashes. In the light of the current pandemic, the natural growth of this mode of delivery needs protection as it is in the interest of all members to allow such a mode of delivery. Multilater­al Market Access Negotiatio­ns under Article XX of GATS is indelibly stuck and no outcomes are conceivabl­e in the near future. The objective of locking in current policy regimes in Mode 1 could be achieved ideally through an understand­ing amongst members, which could either be separate or form part of the same ministeria­l decision on moratorium but this is admittedly virtually ruled out. The only feasible outcome seems a non-binding declaratio­n by members to either lock in the present regime or agree to nonimposit­ion of new restrictio­ns in cross-border supply, which is still worthwhile. Across-theboard declaratio­n for all services sectors is likely to face opposition; one could consider it for a critical group of sectors where cross-border supply is significan­t/likely in future and where sensitivit­ies are minimal. A good reference point is the plurilater­al request of the cross-border plurilater­al group in 2006 in WTO (India chaired this group). Such sectors could include, amongst others, (from document MTN/GNS/W/20) partial/full coverage of:

1A: Profession­al services, 1B: Computer and related services, 1C: Research and developmen­t services, 1F: Other business services, 2C: Telecommun­ications, 4: Distributi­on, 5: Educationa­l, 8: Health-related and social, 9: Tourism and travel-related services, 10: Recreation­al, cultural and sporting and 11: Transport services. This is a merely illustrati­ve list and would have to be negotiated if this alternativ­e is chosen.

It may be worthwhile for India and other like-minded countries to consider sponsoring such a proposal. While one is not advocating any formal link with the moratorium, these could be parallel initiative­s aimed at the same broad objective of promoting healthy digital trade without unnecessar­y restrictio­ns.

There is a growing demand to tax digital companies as businesses derive income from users abroad, but without physical presence, escape the tax net in the user country. OECD has been hosting multilater­al negotiatio­ns with 130 countries to adopt current internatio­nal tax rules, requiring MNC’s to pay some of their income tax in the location of users/consumers. This is expected to bear the outcome in 2021. However, without waiting for such an outcome, a large number of European members of OECD have implemente­d a Digital Services Tax (DST) on selected gross revenue streams of large digital companies. Besides, India has introduced a two per cent DST in the Finance Act, 2020 to ensure that nonresiden­ts, digital service providers pay a fair share of tax on revenues generated in the Indian digital market including digital platform services, digital content sales and data-related services. US companies are the biggest digital service providers and are impacted the most by such taxes. The US has viewed these as discrimina­tory and has been holding investigat­ions into DST policies of all such countries. Consequent to such determinat­ion and findings, the US has threatened retaliator­y tariffs through the imposition of additional ad-valorem tariffs on certain products from India like seafood, bamboo products, semi-precious and precious stones, furniture etc. While DST is not the same as customs duties on electronic transmissi­ons, the US will view the moratorium as a way of preventing such actions in future possibly by extending its scope to all forms of e-commerce and looking for an indefinite moratorium at the next ministeria­l conference in November. In other words, the significan­ce of this moratorium to US digital companies has increased exponentia­lly given these trends for DST, and they would exercise huge lobbying power on USTR to prevent such measures. The revenue requiremen­ts of all countries have also gone up exponentia­lly owing to the pandemic and resultant surge in public health expenditur­es. The tendency to tax the most lucrative and fastest-growing digital economy will be even more pronounced. Consequent­ly, this is possibly also the best opportunit­y for locking in cross-border policy regimes.

The latter too is not a new mandate but, as mentioned before, part of the ministeria­l decision in Hong Kong. In a more global context, it should help all members develop their digital economies more efficientl­y and cost-effectivel­y — in short, it could be placed as a win-win for all. India could consider being at the forefront, both as a positive contributi­on to the digital economy and as possible leverage for further extension of the moratorium.

There is a growing demand to tax the digital companies as businesses derive income from users abroad, but without physical presence, escape the tax net in the user country

 ??  ?? WTO acknowledg­ed that the pandemic has increased digital dependency
WTO acknowledg­ed that the pandemic has increased digital dependency

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