A DEATH KNELL FOR E-COMMERCE?

At the upcoming 12th Ministerial Conference from 12th to 15th June this year, the WTO will be discussing the fate of its “temporary” moratorium on customs duties on electronic transmissions. India and South Africa have been campaigning vehemently for removing the moratorium and returning to tariff impositions on imports.  On the other hand, many nations have been seeking to make the moratorium permanent in the name of free trade and long-term benefits for the global economy.

Background

Electronic transmissions refer to the online trade of digitizable products and the ability to transmit electronic content via digital networks. Digitizable products are traded in both physical and online forms, for instance- a hardcopy of a book and an e-copy of the same book.

E-commerce accounts for less than 1 per cent of total world trade, but is the fastest growing sector. In 1988, the WTO established a work programme and imposed a moratorium on the imposition of customs duties on electronic commerce. Most nations did not have concrete policies on e-commerce, which was an emerging area of trade. The work programme would provide a platform for discussions related to e-commerce and the moratorium would be operating in parallel. Every two years, a Ministerial Conference (MC) would be held to review the moratorium and so far, only extensions have been issued.

Tariff revenues and import duties account for a significant share of public revenue generation and government budgets in developing nations. It has been difficult to shift to other revenue sources in the past. In light of the pandemic, lockdowns and surge in e-commerce, including an increase in online sales and OTT content streaming, developing nations are growing concerned about the potential tariff revenue losses due to the moratorium. This has prompted the duo of developing nations to call for the removal of the moratorium.

Analysis

The first issue is with regards to classification. The decision about whether digitizable goods should be characterised as goods, services or intellectual property remains underway. Europe believes that such goods are actually digital services, while America views digitizable products as goods.

The second issue is on revenue implications. The question about whether revenue losses for the digitised goods be appropriately estimated based on the customs presently levied on the physical versions of the same goods remains unanswered. Such estimations have been the main premise for highlighting potential tariff losses.

The third concern surrounds technological feasibility. Even if it is technologically feasible to levy customs duties on electronic transmissions, would it be more expensive than the net revenue collected?

The call for the removal of the moratorium by developing nations with the belief that it is causing huge potential tariff revenue losses, cites the findings of UNCTAD research papers.   However, concerns regarding the burden of moratorium induced revenue loss shouldered by developing and developed nations are grossly disproportionate. It is pertinent to note that it is mainly developed nations that are responsible for the majority of the exports of digitised goods, while developing nations are its largest importers. Furthermore, these exporters also levy heavier tariffs and additional surcharges, as compared to what the importing developing nations do, magnifying their revenue loss.

On the other hand, The ICC and the OECD supports the demand for a permanent moratorium by developed nations as they claim that it is beneficial for global trade. 

The ICC finds tariffs to be an inefficient and distortive method of raising revenue. While acknowledging the potential revenue loss due to the moratorium, it favours a combination of internal taxation and international tax reforms as a suitable manner for its members to “protect national revenue bases”.

The OECD believes that the moratorium is actually favourable for developing nations. It allows for considerable reductions in transport costs and tariff reductions would imply an increase in consumer welfare. Additionally, this paper holds certain statistics and conclusions contradictory to the UNCTAD research paper, WTO memo and the Indian Receipt Revenue Budget 2022-23. UNCTAD claims that “developing countries with higher potential foregone revenue rely least on customs revenue as a source of overall government revenue.”

There are also fears that if some countries opted out of the moratorium regime, it would lead to a fresh crop of duties on a wide range of international trade. Furthermore, in developing countries imposed high import duties on online services and goods, their own people would suffer the higher prices. This would lead to lower consumption and impact the economic growth. Worse, tax revenues would fall.  Lastly, it is claimed that when a comparision is made between the tariff revenues and the damage to the country's overall economy, the balance would tilt in favour of the loss in revenues from digital transactions.