These days, I am doing some kinds of research on India Bangladesh Trade. The issue is simple that one of my clients wants to produce some garments and textiles and wants to sell in India. The issue is whether the client should produce cloth in India and sell or should it produce it in Bangladesh and bring to India and sell. The issues involved are Indian excise duty rate v. customs duty applicable in imports from Bangladesh.
We are analysing the situation and that’s all for the now. I personally wish that they manufacture such garments in Nepal and bring to India and sell here. Hopefully, it makes these Indian manufacturers/importers these kinds of transactions more cost efficient but my wishes have nothing to do here. At least till now, Client has not thought about Nepal as a viable option.
In this context while doing India-Bangladesh Trade Treaty through Google and other legal database, I stumbled on the below presented article in Nepali magazine-telegraphnepal. I liked the one and already presented to readers in my previous blog entry. The same article is presented here with my comments in bold. I hope that you enjoy reading it and benefit by knowing the reality about Nepal India Trade.
We have just heard that Nepal and India entered into another Trade Treaty recently when Nepalese PM Madhav Kumar Nepal visited India. I have not had the benefit of seeing the text of the treaty yet. If someone has the treaty file or link from where I can see it, kindly let me know.
“Enhancement of Nepal-India bilateral Trade & Commerce Ties
Rajesh Agrawal National Council Member, Confederation of Nepalese Industries
The bilateral framework for trade and transit is provided by the India-Nepal treaties of Trade, of Transit, and Agreement for cooperation to control unauthorized trade 1991. The trade treaty valid for five years was renewed through an exchange of letters on December 3, 1996 and March 5, 2002 and automatically renewed for another five years in March 2007.
Under the Treaty of Trade, India provides, on a non-reciprocal basis, duty free access, to the India market for all Nepalese-manufactured articles barring a short negative list (cigarettes, alcohol and cosmetics), subject to the conditions, since march 2002, that the exports meet the domestic value addition requirement of 30% and change in its classification at four-digit level in the course of manufacture or processing in Nepal.
After the March 2002 revision, annual quotas have been prescribed for duty free exports to India for four sensitive items-vegetable fats (100,000 tons), acrylic yarn (10,000 tons), copper products (10,000 tons) and zinc oxide (2,500tons).
Bilateral trade takes place generally in Indian rupees, but Nepal’s Central Bank maintains a list of items that can be imported from India in us dollars.
The India–Nepal Treaty of Transit, renewed every seven years, provides for port facilities to Nepal at Kolkata and specifies 15 transit routes between Kolkata and the India-Nepal border for bilateral trade, 22 entry/exit points are provided along the Indo-Nepal border. The transit treaty was last renewed in March 2006. The agreement for cooperation between India and Nepal to control unauthorized trade was automatically renewed for five years in March 2007.
The two governments are negotiating a bilateral investment protection and promotion agreement.
India and Nepal signed a rail service agreement in May 2004, to extend cargo train service to the inland container depot (ICD) at Birgunj in Nepal. ICD has been constructed with World Bank assistance of US$ 17 million, while India has constructed the rail tracks which link the ICD with the Raxaul railway station in India. The ICD became operational on 16th July 2004. A container corporation of India-led joint venture Himalayan Terminals Private LTD. is operating the ICD.
I do not know how the operation of ICD in Nepal is. I hope that the businessmen are making full use of it. Irrespective of what kind of political relation we share with India now, in economic areas, we are heavily relying upon India. It is beyond any doubt that India alone is our one of the main trading partners. Given the situation, Nepal should be very serious to gain the advantage that we can have from this relationship. India’s population is so huge that if we focus our supply only to some of the Indian population, Nepal has much to gain. In the bilateral trade, the role of transpiration, storage, warehousing and easy customs clearances are some of the prime factors. Both countries should immediately address these concerns. However close and great neighbor we may be with China, the trade from Chinese side will not be going to increase anytime soon as lack of market routes, lack of road and transportation and immense cost of infrastructure involved. But, if we see the south plain of Nepal, Nepal can be easily connected to broad gauge of Indian Railways which has all India connection. Nepal can reap a lot of advantages from these well networked and connected Indian Railways. For this, he existing ICD should be made fully functional and well connectivity with India adds value to our International Trade.
A motor vehicle agreement for passenger vehicles, initialed on 23rd February 2004 awaits formal signature. The agreement envisages bus services between India and Nepal on 14 routes through 5 borders on reciprocal basis. 53 buses will operate under this agreement everyday. Individuals traveling to either country in their personal vehicles would also be able to cross over into the other country without payment of any charge for the first five days.
Why this treaty is not signed yet? This treaty is citizen centric and it helps people of both countries travel freely and without much hassles. As we have already visa and passport free regimes, motor vehicles also should be allowed without any fees but only registration at entry point. Nepal has much to gain from tourism if this treaty is signed. Nepal and India are great pilgrimage sites for many people and many people can travel easily to each other’s countries. Even the presence of few lakhs of Indian people in Nepal annually among those thousand of lakhs people will help our tourism to grow a lot.
Now I would like to high light some of the issues related to trade:
The trade treaty between India and Nepal has made specific provision which allows access of Nepalese manufactured goods to the Indian market without payment of any customs duty.
Generally, when they exempt from customs duty, it is exemption from Basic Customs Duty (‘BCD’). As per Indian law, Customs Duty (‘CD’) has three components. They are Basic Customs Duty (‘BCD’), Additional Duty of Excise (‘CVD’ – It should not be said ‘CVD’ as ‘CVD’ means Countervailing Duty as per WTO laws and will be imposed on different condition and situation but In India, even though, it is a wrong expression, all say it ‘CVD’ with an admission that it should not be called ‘CVD’, and this duty – ‘CVD’ – is imposed in lieu of excise duty, which would be imposed had goods been manufactured in India), and Special Additional Duty (‘SAD’) (imposed in lieu of State level sales tax/Value Added Tax or VAT). So, the major components of can be written down as follows:
CD=BCD+CVD+SAD, and there will be education cess separately and in some products coming from some special countries, there could be anti-dumping duty as well.
Therefore, most of the time when treaty between two countries exempt customs duty in its text, it is only exempt from BCD. So, still there CVD+SAD remains and importer in India has to pay that. Typically, in India, the Trade Treaties are entered by Ministry of Commerce; and they will not be laws automatically. After Treaties are entered by Ministry of Commerce, Ministry of Finance, Central Board of Excise and Customs (‘CBEC’) will issue a Notification as per the treaties entered and most of the Notification, generally as a matter of rule, only mentions the exemption of BCD and do not talk about CVD and SAD. This is not only with respect to Notification issued as per Nepalese treaties but also in Notifications issued as per treaties with other countries like Bangladesh, and other African Countries.
But in the past, through national budgets additional duties to the extent of 4% has been imposed on Nepalese exports, later on at the request of Nepalese’s exporters as well as Nepal government these duties were called off. This problem is because of the CBEC Notification only mentions exemption from BCD.
Eventually when the 4% additional duty was waived by other notification, it was made applicable only to those items, which were being exported by the date of the notification as per the list approved by the finance ministry on the basis of H.S. Code classification.
Many items which could have been exported or are exported from Nepal are still subject to this 4% additional duty. This 4% additional duty is called SAD and is in lieu of state level sales tax and VAT in India. Though the VAT rate in India is different for different products, and different for the same products also in different states of India, the SAD is a standard one and is 4% as most of the goods in India are liable to VAT @4% across all the states. The really SAD story about this SAD is that Indian government by Notification has allowed the refund of SAD under certain circumstances. That means importer in India first pays the SAD component while clearing the goods from customs and later, has to file application within one year to ask refund of SAD component if the importer satisfies certain conditions laid down in the Notification. Unfortunately, in India, it is easier to tie a bell in tiger’s neck than to get refund from tax authorities and importer will lose this money which he recovers from final customers and costs of goods will go high which effectively means the exports from Nepal becomes expensive and makes Nepal less competitive.
By this the exports under Nepal India trade treaty has virtually frozen to the items enlisted prior to the notification and for the new items, the treaty is virtually extinct.
As a result of such discretionary levy of the additional duty, Nepalese exports have been badly impacted.
Agro based industries are facing problem of quarantine and lab testing and borders. There is another problem I want to highlight from my practical experience. My home is in eastern Jhapa and cross kakarbhitta Border many times. I see almost all the time, the trucks loaded with wheat ready to go to Bangladesh from Phulbari Banglaband Marg are lined up on the roadside almost for 10-15 Kilometers by not getting customs clearance from India. There is a need of warehousing and large containers to reduce the costs of exports. And this should be done by Nepalese Customs Authorities as well.
The garment industries are facing problems of levy of CVD in India on the basis of MRP.
On this aspect, Nepal should talk with India firmly and much hyped Nepal India Trade Treaty may cover this. But, one thing I want to highlight here is that in this case Nepal is not singled out, almost all the countries are subject to CVD but we should talk with Indian Government and should convince Indian Government to exempts from CVD as well. Interestingly, because of economic recession, Indian government reduced excise duty on almost all goods by 4% in December, 2008 to give impetus to domestic market, and the rate of CVD also automatically went down as CVD rate corresponds to the excise duty rate. On comparative advantage analysis, it may not be that great news to Nepalese exporters as ultimately they have to compete Indian products but in absolute terms, the duty of CVD has gone down by 4%.
Quota and canalization on vegetable fat, acrylic yarn copper products, zinc oxide
On specific items like steel pipes it is required to take ISI mark from BIS before they can be exported though they have already taken ns mark from Nepal bureau of standards.
Pharmaceutical industries are unable to export their products to India, because the registration of their pharmaceutical products in India is almost impossible.
The indo Nepal trade treaty allows for sending any machinery for repair & maintenance only within 3 years of importation from India to Nepal. Whereas in normal cases, it is after 3-4 years of installation that a machinery requires repair and maintenance.
On this point, Nepalese importers will have difficulty to bargain with Government of India as in India, even imports from third countries to India are allowed to send out and bring without payment of duty only within 2 years. I am not so sure about the time period but I am sure not definitely after three years.
By products not being allowed to be exported in India;
These are products where main finished products are allowed to be exported in India, but by–products generated during the course of manufacture of the finished products are not allowed for export to India due to some prohibitions either due to the Exim policy of India or some other notification.
Heavy congestion at Kolkata port resulting in delay and cost increase of import cargos.
Road and customs infrastructure not sufficient, very weak at the borders.
It should be specifically provided in the treaty that neither the central government of India nor the state governments will levy any form of additional duty on goods imported into India from Nepal as per the provision of the India Nepal trade treaty. This is difficult to mention in the treaty as federal structure in India does not allow deciding central government on the matters of taxation of States. However, should Indian Government try to implement this thing, some sorts of relief to Nepalese exporters can be expected. And whatever products it is being levied currently should be waived immediately.
Regarding quarantine testing Nepalese labs should be accredited for the testing.
Third party pre-shipment inspection and their certification is the norm for the exports all over the world, the same can be made applicable for India-Nepal trade on agro products.
Initiations had started for negotiating a bilateral cooperation agreement on standards between bureau of Indian standards and Nepal bureau of standards and meteorology. It should be finalized with both recognizing quality standard marks provided by each other.
Nepal allows the import of Indian products with the minimum of non-tariff barriers and the Nepali exporters also expect the same treatment from the counterpart.
Provision for allowing the sending of machinery for repair and maintenance within 3 years of import only to be amended to remove the 3 years boundation.
The motor vehicle agreement for passenger vehicles should be formalized to allow Nepalese vehicles into Indian Territory which at present require a permit.
Removal of quota and canalization; when the quota was prescribed in 2002 on vegetable ghee, acrylic yarn, copper products, zinc oxide, the import duties in India on these products were very high, but now they have been significantly reduced and in some cases it is even 0%, so there is no logic in continuing with the quota.
Nepali manufactured goods out of Indian and or Nepali raw materials should have a separate procedure for export to India. They should be given national treatment as given by the central government of India to the states like Assam, Meghalaya, Uttarakhand and Himachal Pradesh in terms of tariff and non-tariff issues.
The DRP system (duty refund procedure) was introduced for goods exported from India to Nepal in Indian currency with a view to increase trade with Nepal as well to reduce the landed cost of goods to the consumers of Nepal. Under this system the amount of excise duty paid on Indian goods is given as rebate in the customs duty levied by Nepal and that amount is refunded to the Nepal government by the Indian government. During that time import duties were about 25% in Nepal so the full excise amount would be exempted but now the duties have fallen to the range of 5-10% resulting in the full excise not being exempted hence Indian goods becoming expensive.
So for all exports from India to Nepal in Indian currency excise duty should not be charged as in the case of dollar exports.
For the congestion being faced in Kolkata additional sea ports with railway connection for Nepal as JNPT, Kandla, Vishakhapatnam and ICD Tuglakabad for import and export of goods from Nepal should be provided.
ICD Birgunj should be connected with major ICD of India for bilateral and overseas cargo.
The facilities of concur should be extended to carry export material from Nepal to major cities of India and vice versa
Goods imported from third country into India are not allowed to be re-exported to Nepal. This provision should be removed and goods imported into India from third country should be allowed to be re exported to Nepal.
Improvement of cross border trade related infrastructure such as upgrading major customs check points at Birgunj-Raxaul, Biratnagar-Jogbani, Bhairawaha-Sunauli and Nepalgunj-Rupediya to international standards, upgrading approach highways to the border on the Indian side and the Nepalese side; and broad gauging and extending rail links to Nepal.
Lastly rivers flowing from Nepal into India constitute an important part of the Ganges river system. Nepal’s enormous hydropower potential estimated at 83,000 mw, of which 44,000 mw is considered economically feasible, could transform Nepal’s economy.
There is considerable scope for mutually beneficial cooperation between India and Nepal in developing small and medium sized hydropower projects in Nepal for internal use in Nepal or exports to India. Nepal’s hydropower development policy permits private and foreign investment in generation of hydropower, including for exports.
Some Customs Notification issued by CBEC in India:
In this portion, I have presented some of the Notifications issued by Indian Government in relation to customs duties on various goods imported from Nepal. Some of the Notifications may have been withdrawn or superseded by subsequent Notifications, therefore, all may not be valid Notification now but this list should give general idea to you:
The Notification is CUS NTF NO. 03/1997 DATE 16/01/1997, Exemption to goods imports from NEPAL and This Notification has been superseded by Cus Notification No. 85/98 dated 5-11-98.
The Notification is Cus Notification No. 85/1998 Date 5-11-1998, Exemption To Specified Goods Imports – Nepal and SUPERSEDES 3/97 DATED 16-1-97.