Indian Tariff on Smartphones – Will India Outsmart the WTO?

In 2018, India hiked the tariff duty on certain Information and Communication Technology (‘ICT’) products including mobile phones up to 20%.[1] This exorbitant increase triggered Member Nations, especially the European Union (‘EU’), Taipei and Japan, to point out that such imposition of tariff was inconsistent with India’s WTO obligations under the General Agreement on Tariffs and Trade (‘GATT’) and Information Technology Agreement (‘ITA’).

In April 2019, the EU[2] requested consultations with India on this issue, followed by Japan,[3] the United States[4] and Taipei[5] in the subsequent months. The request for consultations, the first stage of the WTO dispute settlement mechanism (‘DSM’),  indicates that India’s imposition of such tariff is in excess of its commitments undertaken in its GATT Schedule.[6]  Further, the EU,[7] Japan,[8] Taiwan, Penghu, Kinmen, and Matsu,[9] (the ‘Complainants’) have requested the establishment of a panel.

Analysis under the ITA

India has consistently argued, for the last three years, that these are “new products” that were not in existence at the time of its commitments under the ITA. India is one of the initial signatories to the ITA, which was signed on December 13, 1996.[10] The ITA binds each party to the agreement to eliminate charges of any kind (including customs duties) on all products classified in the annex to the agreement.

For the purposes of our discussion, the classification ‘other telephone sets and videophones’ and ‘transmission apparatus incorporating reception apparatus’ are the only classifications remotely related to mobile phones. Interestingly, the heading to such classification dealt with only ‘line telephony’. This was subsequently amended via Harmonised System (‘HS’) 2007 to include apparatus for communication in a wired or wireless network.[11] Further, the HS 2007  replaced ‘transmission apparatus incorporating reception apparatus’ with ‘Telephones for cellular networks or other wireless networks’, specifically due to technological progress in the high technology sector.[12]  Thus, as India suggests, mobile phones were never intended to be within these classifications at the time the ITA was signed.

Additionally, the expansion under the Harmonised Systems of 2002 and 2007 was never transposed into the ITA until 2015, when India officially stated that it would not be part of the revised ITA.[13] India categorically stated that its experience with the initial ITA was detrimental to the Indian IT Industry, in that it was almost wiped out. However, while India’s eloquent stance might be viable under the ITA, the Complainants have not requested a finding for a  breach under the ITA.

Analysis under GATT, 1994

The Complainants have specifically alleged that the imposition of a 20% tariff on mobile phones is a violation of Article II:1 (a) and (b) of the GATT. Article II:1(a) of the GATT mandates that each member shall accord to another member, no less favourable treatment than what is provided for the Schedule and Article II:1(b) seeks to ensure that no imported product of a Member shall be subject to ordinary custom duties in excess of those set forth in the Schedule. In theory, a violation of Article II:1(b) results in an automatic violation of Article II:1(a) as well.

India, vide the Finance Bill, 2018 has imposed a 20% tariff on – a) Mobile phones, other than push button type b) Mobile phones, push button type and c) Telephones for other wireless networks.[14] However, as per India’s current commitment under ‘Telephones for cellular networks, “mobile telephones” or for other wireless networks’, no tariff can be levied. Therefore, any tariff imposed on mobile phones is a WTO inconsistent measure. Although it is true that these specific classifications were not present in 1996, India subsequently updated its schedule to be in compliant with the HS 2002 and HS 2007 systems which introduced the terms ‘cellular networks’ and ‘mobile phones’.[15]

The recent trend suggests that India is likely to argue that at the time of its commitments these products were non-existent and accordingly, not within the purview of its schedule. Such an argument is untenable on the following grounds:

First, India voluntarily committed itself to no tariffs under the ‘Telephone for Cellular Networks “mobile phones” or other wireless networks’ classification. A classification which is crystal clear. The term ‘Telephone’ is self-explanatory. As regards ‘Cellular’ – the WTO Glossary to the Telecommunication Services defines ‘Cellular service’ as “ a terrestrial radio-based service providing two-way communications (..), data services and private voice services, and as an alternative to fixed wired telephone”.[16] Further, ‘network’ has been defined as “the ensemble of equipment, sites, switches, lines, circuits, software, and other transmission apparatus used to provide telecommunications services”.[17] Therefore, it is unambiguous that ‘Cellular Networks’ means any equipment that is capable of providing terrestrial radio-based service providing two-way communications, data services or private voice services as opposed to telephones that converts sound and electrical waves into audible relays through cables.

Second, India has sought to create an artificial division based on build such as “push button” or without “push button” (possibly, touchscreen phones or smartphones) within the classification in order to hide under the aegis of a “new product”. However, the classification of ‘Telephone for Cellular Networks “mobile phones” or other wireless networks’ is a function based classification.

The Panel in EC- IT Products had adopted a similar approach in determining the scope of ‘modem’.[18] In a nutshell, on the one hand, the United States (amongst others) argued that the term ‘modem’ included any device (ISDN, WLAN or Ethernet) that permitted access to the internet and on the other, the EU argued that ‘modem’ must be interpreted at the time of agreement and must include only those devices that connect to the Internet and perform digital-to-analogue modulation and reverse demodulation via standard telephone line. However, the panel noted that the ordinary usage of the term ‘modem’ evolved with the advent of newer technologies to transfer data and found that the intention behind the inclusion of the term ‘modem’ was more functionalist (any device that accesses the internet) and not formalistic i.e. a particular kind of device. Thus, the narrow definition of the EU was disregarded.

Analogously, the term ‘mobile phone’ must also be viewed in a functionalist manner, i.e. any equipment that is capable of providing terrestrial radio-based service providing two-way communications. Therefore, any device – a smartphone or a push button phone’s primary function is to provide cellular network. Consequently, if such divisions are tolerated there is nothing stopping countries to create unreasonable divisions based on features, performance, or other specifications, such as “Mobile phones using Android OS, Apple iOS and so on”. These divisions are merely conniving moves to wriggle out of one’s existing commitments.

Ironically, the so-called “new product” was first seen in the early 1990s. In fact,  IBM had introduced ‘Simon’ in 1992 – a touchscreen mobile phone cum personal digital assistant, 5 years prior to India signing its initial commitments.[19] Further, when India updated its schedule in the 2000s to comply with the HS 2002 and 2007 systems, the use of smartphones were on the upward trend. Therefore, the WTO will most likely not entertain a plea of ignorance, which has no legal basis whatsoever.

Conclusion

India’s motive behind the sudden imposition of tariff on mobile phones and its withdrawal from the ITA can be explained by its desire to build a sound manufacturing environment within the country. The question still remains whether India can outsmart the WTO? Not really.

India willingly and knowingly modified its Schedule incorporating the HS 2007 system in the mid 2000s. A decade later with a shift in political parties and political ideologies, India seeks to renege its commitments. Such a drastic step can prove fatal in the event the Panel holds India violative of GATT Article II:1(a) and (b), an event that is quite likely.  The Indian market will, in turn, be flooded with cheap electronics, thereby effectively disabling the home-grown industry from competition. This is a fear that has been voiced even by the Indian Cellular Electronic Association.[20] Additionally, the inefficacy of the current DSM can be an aggravating factor encouraging Members to adopt such methods under the specious belief that they can get away with it.

Taking cue, other members must be aware that creating artificial technical divisions to by-pass WTO commitments is not be the best way forward. There might be certain short-term benefits which will eventually be outweighed by the long-term loss. Therefore, it is the need of the hour for the next WTO Director to take effective measures to rebuild the lost faith in the DSM and to ensure compliance with WTO commitments.

[1] The Finance Bill 2018, the Second Schedule (Finance Bill 2018).

[2] WTO, India – Tariff Treatment on Certain Good in the Information and Communications Technology Sector – Request for consultations by the European Union (9 April 2019) WT/DS582/1.

[3] WTO, India – Tariff Treatment on Certain Goods – Request to join consultations – Communication from Japan (10 May 2019) WT/DS584/1.

[4] WTO, India – Additional Duties on Certain Products from the United States – Request for consultations by the United States (4 July 2019) WT/DS585/1.

[5] WTO, India – Tariff Treatment on Certain Good in the Information and Communications Technology Sector – Request for consultations by Chinese Taipei (9 September 2019) WT/DS588/1.

[6] General Agreement on Tariffs and Trade 1994, India’s Schedule of Concessions in Goods.

[7] WTO, India – Tariff Treatment on Certain Goods in the Information and Communications Technology Sector – Request for the establishment of a panel by the European Union (18 February 2020) WT/DS582/9.

[8] WTO, India – Tariff Treatment on Certain Goods – Request to join consultations – Communication from Japan (19 March 2020) WT/DS584/9.

[9] WTO, India – Tariff Treatment on Certain Good in the Information and Communications Technology Sector – Request for consultations by Chinese Taipei (30 March 2020) WT/DS588/7.

[10] Ministerial Declaration on Trade in Information Technology Products (13 December 1996) WT/MIN(96)/16.

[11] WCO, Table Correlating the 2007 Version to the 2002 Version of The Harmonized System http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/nomenclature/instruments-and-tools/hs-nomenclature-older-edition/2007/correlations-2002-2007/hs_correlation2007_table_i_e_rev5.pdf?la=en accessed 21 June 2020.

[12] ibid.

[13] Ministry of Commerce and Industry, ‘India & World Trade Organization (WTO) – Other Issues – Information Technology Agreement’ (Department of Commerce, August 2015) https://commerce.gov.in/PageContent.aspx?Id=64#:~:text=India%20is%20a%20signatory%20to,Information%20Technology%20(IT)%20products accessed 21 June 2020.

[14] Finance Bill 2018.

[15] WTO, Situation of Schedules of WTO Members – Note by the Secretariat (24 August 2017)  G/MA/W/23/Rev.13

[16] WTO,  ‘Telecommunication Services – Glossary of Terms’ https://www.wto.org/english/tratop_e/serv_e/telecom_e/tel12_e.htm accessed 21 June 2020.

[17] ibid.

[18] WTO, European Communities and its Member States – Tariff Treatment of Certain Information Technology Products – Reports of the Panel (16 August 2010) WT/DS375/R ; WT/DS376/R ; WT/DS377/R.

[19] Christine Erickson, ‘The Touching History of Touchscreen Tech’ (Mashable, 9 November 2012) https://mashable.com/2012/11/09/touchscreen-history/ accessed 21 June 2020.

[20] Anandita Singh Mankotia, ‘Smartphone companies warn India of looming WTO probe into duty format’ (The Economic Times, 10 March) https://economictimes.indiatimes.com/news/economy/policy/smartphone-companies-warn-india-of-looming-wto-probe-into-duty-format/articleshow/74558321.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst accessed 21 June 2020.