Introduction

Big time for collaboration between the Tiger and the Kangaroo. Especially with the dragon breathing down fire just at the corner of the road.

Shri Piyush Goyal, Union Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution, and Textiles, Government of India, on 2^nd of April 2022 announced the unveiling of the Australia-India Economic Cooperation Trade Agreement (AIECTA) between India and Australia.

The agreement also sets out that the ECTA will lead to a full-fledged Comprehensive Economic Partnership Agreement (CEPA) by making required amendments as per provisions of Article 14 and the negotiations shall commence 75 days from date of signature of this Agreement by a Negotiation Subcommittee which shall be established for the purpose. The amendments shall include market access for goods and services, a complete Product Specific Rules Schedule, a Digital Trade Chapter, and a Government Procurement Chapters

This note provides briefly the contours of the AIECTA as regards the cross border trade of goods mainly are concerned.

Objectives of the ECTA agreement

To strengthen their economic relations, further liberalise and expand trade and investment, enhance economic growth, create opportunities for workers and business, improving living standards, and promote sustainable growth.

To establish an agreement that will ultimately lead to the conclusion of a fuller Comprehensive Economic Cooperation Agreement in order to promote further economic integration to liberalise trade and investment.

A trade agreement that encourages trade and investment flows that will benefit the economies of both the Parties and to explore new areas of economic cooperation and develop appropriate measures for closer economic cooperation between the Parties

To establish a free trade in terms of India-Australia Economic Cooperation and Trade Agreement.

Brief on Tariff Commitments

It is set out the term Year means, with respect to the first year, the period from the date of entry into force of this Agreement until 31 December of the same year and, with respect to each subsequent year, the twelve-month period which starts on 1 January of that year.

For the purposes of implementing equal annual instalments, the annual instalments shall take place on the first day of each year (for the avoidance of doubt, for the first year, the annual instalment will take place on the date of entry into force of this Agreement).

The following explanation of various column headings of the Schedule of Specific Tariff Commitments of India on Trade in Goods shall apply:

(a) The Column heading “Number of years in which customs duty will be eliminated /reduced” indicates the number of years in which customs duties on originating goods classified under the tariff lines will be reduced or eliminated under equal annual instalments. It also mentions “TRQ” where Tariff Rate Quota has been offered.

(b) Customs duties on originating goods classified under the tariff lines indicated with “EIF” shall be eliminated, as from the date of entry into force of this Agreement.

(c) Customs duties on originating goods of HS2204 shall be reduced as set out in the Wine Appendix of the Schedule of Specific Tariff Commitments of India on Trade in Goods.

(d) The originating goods classified under the tariff lines indicated with “EL” shall be excluded from any commitment of reduction or elimination of customs duties.

(e) The Column heading “Duty Elimination (E), Reduction (R), TRQ (T), Other condition (C), Exclusion List (EL)” mentions the treatment for each tariff line.

(f) The Column heading “Condition for liberalisation – Duty reduction, other conditions” mentions specific conditions, if any attached to the offer.

The waiver is applicable only in terms of Basic customs duty and any cess, surtax or surcharge imposed in connection with such importation, but does not include any anti-dumping or countervailing duty applied

Trade in Goods

A comprehensive and in fact an exhaustive list of items along with the rates various features to be kept in mind while trading in goods among the two countries are set out in the document.

When the said agreement is in force the parties shall not increase the existing customs duty nor adopt any new customs duty on originating goods. The rates shall be progressively reduced or eliminated on originating goods.

The parties shall not adopt or maintain any non-tariff measure on importation or the exportation of good expect in accordance with the WTO agreement of the AIECTA.

Both countries are expected to undertake cooperation and capacity building activities in areas related to agriculture and agricultural trade for mutual benefit.

Tariff Rate Quotas (TRQ)

The schedule of specific tariff commitments of India on trade in Goods is set out in terms of 8-digit HSN coding with the description there to for practically for all the HSN tariff.

The tariff concessions for Tariff Rate Quotas (TRQs) are provided only up to the volume as specified in Schedule of Specific Tariff Commitments on trade in goods. the TRQ quantities shall be pro-rated and calculated as a proportion of the annual TRQ quantity equal to the number of days remaining in the year 3.

Rules of Origin

One of the most critical and vital parameters of any FTA is the prescribed Rules of Origin to determine as to whether the goods have emerged from indeed the exporting country so as to ensure that there is no unnecessary dumping of goods into the trading partner. For instance, manufacturer refers to any kind of working or processing or specific operations that does not include simple assembly. The India Australia AIECTA is much more important since Australia has in the recent past signed the multi country Regional Comprehensive Economic Partnership agreement that includes China and India as it should, would want to take all the necessary precautions to ensure that goods through China are not dumped into India through the Australia India arrangement.

For the purpose of this chapter, it is important to understand that the custom administration for Australia is Department of Home affairs and its successors and for India is Central Board of Indirect taxes and Customs.

The following definitions are imperative to the rules of origin-

Agriculture- mariculture, means the farming of aquatic organisms including fish, molluscs, crustaceans, other aquatic invertebrates, and aquatic plants from seed stock, including seed stock imported from non-parties, such as eggs, fry, fingerlings, or larvae, by intervention in the rearing or growth processes to enhance production such as regular stocking, feeding, or protection from predators.
CIF value or cost, Insurance and freight value– means the price actually paid or payable to the exporter for a good when the good is loaded out of the carrier, at the port of importation, including the cost of the good, insurance, and freight necessary to deliver the good to the named port of destination.
FOB Value or free on board- means the price actually paid or payable to the exporter for a good when the good is loaded onto the carrier at the named port of exportation, including the cost of the good and all costs necessary to bring the good onto the carrier.
packing materials and containers for transportation and shipment- means goods used to protect another good during its transportation but does not include the packaging materials or containers in which a good is packaged for retail sale.
Production- means operations including growing, cultivating, raising, mining, harvesting, fishing, trapping, hunting, capturing, collecting, breeding, extracting, aquaculture, gathering, manufacturing, processing or assembling a good.
preferential tariff treatment– means the customs duty rate applicable to an originating good, pursuant to each Party’s Schedule in Annex 2A (Tariff Commitments)
QVC– is the qualifying value content of a good, expressed as a percentage.

What are originating goods

A good is considered to be fully originating if the same is wholly obtained or produced in territory or the same are produced entirely in the territory of the parties, using non-originating materials, provided the goods satisfies all applicable requirements.

When the goods are not wholly produced or obtained, the same shall be considered originating if all the non-originating materials have undergone at least a change in their tariff sub-heading and the QVC of the good is not less than 35% of the FOB value as per build-up formula or 45% of the FOB value calculated as per build-up formula, provided that the final production process of the manufacture of the good is performed within the territory of exporting party.

Product Specific Rules

The said schedule that shall contain product specific rules for all tariff lines in harmonized system. A provision shall be included to identify if the goods are produced exclusively from originating materials. Further, a provision shall be included that would identify a good or material as originating if it is produced in the territory of one or both of the Parties by one or more producers, provided that it satisfies the requirements as mentioned in the rules.

The following are considered as wholly originating or produced goods-

plant and plant goods, including fruit, flowers, vegetables, trees, seaweed, fungi, algae and live plants grown and harvested, picked, or gathered there
live animals born and raised there
goods obtained from live animals born and raised there
goods obtained by hunting, trapping, fishing, aquaculture, gathering, or capturing there
minerals and other naturally occurring substances, not included in subparagraphs (1) to (4), extracted or taken from the soil or waters, seabed or subsoil beneath the seabed there
fish, shellfish, and other marine life extracted or taken from the sea, seabed or subsoil beyond the outer limits of the territories of each Party and, in accordance with international law, outside the territorial sea of non-parties by vessels that are registered, listed or recorded with a Party and entitled to fly the flag of that Party.
goods produced on board a factory ship registered, listed or recorded with a Party and entitled to fly the flag of that Party from the goods referred to in 6.
goods other than fish, shellfish and other marine life extracted or taken from the sea-bed or subsoil beneath the sea-bed outside the territorial sea of a Party, provided that the Party has rights to exploit such sea-bed or subsoil beneath the sea-bed in accordance with relevant international law
waste and scrap derived from production or consumption there, provided that such goods are fit only for the recovery of raw materials, or for recycling purposes and
goods produced in the territory of one or both Parties solely from products referred to in subparagraphs (1) to (9) or from their derivatives at any stage of production.

The FTA as well provides for the calculation of qualifying value content that is to determine whether or not the goods is originating. The same can be computed using

a) Build down formula
b) Build up formula

Further, the chapter also provides a list of functions such as disassembly of products into parts, packaging etc that when undertaken on non-originating items shall not qualify as originating good.

Indirect materials shall be considered as originating irrespective of where it is produced. Fungible goods shall be treated as originating based on the physical separation of the good or use of any inventory management method recognised in GAAP.

Proof of Origin

Certificate of Origin

The Certificate of Origin plays a vital role in ensuring that the fairness in terms of the nature of the originating material and as to which categorisation the same would fall under is mentioned as part of the certificate.

The Certificate of Origin shall be issued by an issuing body or authority, as considered appropriate, by the exporting Party, upon an application by an exporter, producer, or their authorised representative and shall contain the signature and official seal.

The certificate of origin shall be forwarded by the exporter or producer to the importer. The COO shall be issued prior to or within 5 working days from date of exportation.

For the purposes of claiming preferential tariff treatment, an importing Party shall provide that an importer-

make a declaration that the good qualifies as an originating good
have a valid Certificate of Origin in its possession at the time the declaration referred to in subparagraph (a) is made
provide a copy of the Certificate of Origin to the importing Party if required by the Party and
if required by an importing Party, demonstrate that the requirements as specified have been satisfied.

In addition to this the exporter or producer shall submit minimum information requirements and supporting documents for issuance of COO. Each Party shall provide for an importer of a Party to apply for preferential tariff treatment and a refund of any excess duties paid for a good if the importer did not make a claim for preferential tariff treatment at the time of importation, provided that the good would have qualified for preferential tariff treatment when it was imported into its territory.

The ECTA also provides the format for Minimum information requirement and Annexure B mentions the product specific rules with the tariff heading and sub-heading.

Sanitary & Phytosanitary Measures

The sanitary and phytosanitary measures were introduced by the WTO to ensure that the consumers are supplied with produce/food that is safe to eat based on the standards prescribed by laws. It basically sets out the rules for food safety and animal and plant health standards.

SPS has paved its way into the agreement as well. This chapter is set out to protect the human, animal, plant life or health and to encourage the development and adoption of science based international standards, guidelines and recommendations.

There should be a measure of equivalence that both the importing and exporting country should be able to demonstrate objectively and the same level of protection measure. Both Importing and exporting party must recognise regional conditions including pest and disease free areas.

The parties must conduct a risk analysis in accordance with the SPS Agreement (Sanitary and Phyto Sanitary measure) and ensure that the same is documented and consider risk management option that do not restrict the trade arrangements while upholding the appropriate level of sanitary or phytosanitary protection.

Both parties must exchange information and shall be transparent and shall work towards issuing the relevant documents and certificates electronically/digitally.

Audit and Import checks

Audits shall be system based and designed to check the effectiveness of the regulatory controls. Where a certification is mandated for trading in a particular product, the importer shall ensure that such certification includes the SPS conditions. Import checks shall be applied where animals, animal products, plants and plant products are traded.

In case any emergency measure is adopted which is necessary for the protection of human, animal or plat life the same shall be communicated by both parties at the earliest to avoid impact on trade.

The exporting party is expected to notify importing party the significant SPS risk related to the exported goods, any urgent situation where there is a change in animal or plant health status or change in regional pest and disease area, scientific findings or significant changes in food safety, pest pr disease management and control policies.

Technical Barriers to Trade

Technical barriers to trade are set to ensure standards and procedures do not create obstacles for conducting trade. Facilitating information exchange and addressing issues arising.

However, this chapter shan’t apply to Sanitary and Phytosanitary measures and purchasing specifications prepared by governmental bodies for production or consumption requirements of such bodies.

Where technical regulations are required and relevant international standards exist or their completion is imminent, each Party shall use them, or relevant parts of them, as a basis for its technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems. Where a Party does not use such international standards, or their relevant parts, as a basis for its technical regulations and these may have a significant effect on its trade with the other Party, it shall, upon request of the other Party, explain the reasons.

Pharmaceutical Products

The agreements sets out that regulatory bodies of both the Parties shall work together to facilitate trade in human prescription medicines and medical devices.

The regulatory bodies for each of the parties is as follows:

Therapeutic Goods Administration (TGA) of Australia, or its successor.
The Central Drugs Standard Control Organisation (CDSCO), or its successor.

These bodies may utilise reports and Good Manufacturing Practise (GMP) from recognised regulatory authorities for quality assessment of manufacturing facilities and evaluation of products manufactured of the other party, subject to their laws and regulations.

There shall be no recourse to dispute settlement provisions of the agreement for matters pertaining to pharmaceuticals

Customs Procedures and Trade Facilitation

The following parameters are quite important to bear in mind.

Custom procedure- the measures applied by the customs authority of each Party.
Customs Law- means such laws and regulations administered and enforced by the customs authority of each Party concerning the importation, exportation, and transit or transhipment of goods.
Trade facilitation Agreement- the Agreement on Trade Facilitation, set out in Annex 1A of the WTO Agreement.

Both parties must ensure that the laws, regulations and guidelines, procedures and administrative rulings governing customs matters are published. For facilitating ease of trade there must be a system of paperless communication as the time is of essence.

The parties must also ensure that the customs procedures must be applied in a transparent manner and to facilitate trade and ensure that the procedures, and regulations conform with the practices as set out by the World Customs Organisation. Simplified procedures must be put in place for release of goods, so as to avoid any damage especially on perishable goods.

A risk management system shall be adopted enabling customs authority to focus its inspection activities on high-risk consignments and expedite the release of low-risk consignments.

Advance Ruling- the parties shall provide for issuance of advance ruling, prior to importation of goods and such ruling shall be apply on the date of ruling or a later date if the ruling mentions so. The advance ruling is binding only on the person to whom the ruling is issued.

Trade Remedies

Trade remedies are actions that are taken in response to subsidies, sales at less than fair value and import surges.

Anti-dumping measures concern border measures applied to imports of a product from an exporter, whose imports are causing injurious dumping to the domestic industry producing the like product, or to third countries’ exporters of that product.

The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) addresses multilateral disciplines regulating the provision of subsidies, and the use of countervailing measures to offset injury caused by subsidized imports.

Bilateral Safeguard measures are put in place to keep a check on the injury caused to the domestic markets by importing goods in large quantities as a result of reduction or elimination of a customs duty under the agreement. In such scenario there will be suspension of further reduction in duties, increase in rate of customs duty on such commodities, quantitative restrictions.

In case there is a case of serious injury or threat caused by increased imports, consultations shall be initiated immediately after the measure is taken. When a definitive safeguard measure is applied the same shall provide for an adequate opportunity prior to taking such a measure and to review the information.

Therefore, a measure shall be applied only after an investigation and shall be applied only to the extent and for such time as may be necessary to prevent such injury or for a period of two years (may be extended). Further, no bilateral safeguard measure shall be applicable for import of an originating good for a period of one year from the date of commencement of tariff reduction or tariff elimination for that originating good.

Provisional Measures

In case of a critical situation where delay would cause damage that would be difficult to repair, a Party may apply a bilateral safeguard measure on a provisional basis pursuant to a preliminary determination by its competent authorities that there is clear evidence that imports of an originating good from the other Party have increased as the result of the reduction or elimination of a customs duty under this Agreement, and such imports have caused serious injury, or threat thereof, to the domestic industry.

The duration for such provisional measure shall not exceed 200 days and a refund of increased duty shall be processed if the investigation does not result in findings.

A mutually agreed compensation shall be provided to the party applying for such measure. In case of originating agricultural goods from a Party pursuant to special safeguard under the agreement no duties shall be applied

Trade in services

The supply of Services from other party is defined under the agreement as a service which is supplied:

from or in the territory of that other Party, or in the case of maritime transport, by a vessel registered under the laws and regulations of that other Party, or by a person of that other Party which supplies the service through the operation of a vessel or its use in whole or in part or
in the case of the supply of a service through commercial presence or through the presence of natural persons, by a service supplier of that other Party

The “measures by a party” means measures taken by:

central, regional, or local governments and authorities of that Party; and
non-governmental bodies in the exercise of powers delegated by central, regional, or local governments or authorities of that Party.

The trade in services provisions under the agreement applies to measures taken by a Party affecting trade in services and does not apply to the following:

Procurement of services by government agencies
Subsidies and grants
Services provided in exercise of government authority
cabotage in maritime transport services
Measures affecting air traffic rights subject to certain exclusions
Measures affecting natural persons seeking access to employment market, pertaining to citizenship, permanent residency or permanent employment (Chapter 9 – Temporary Movement of Natural Persons)

The benefits under the trade in services provisions is majorly towards market access and national treatment where market access commitments are undertaken along with specific commitments where each party shall accord services and service suppliers of the other party treatment no less favourable than that provided under the terms of the agreement subject to certain conditions.

The agreement also sets out annexures for specific provisions namely:

Annex 8A sets out the various provisions pertaining to supply of financial services between the parties
Annex 8B sets out provisions and conditions pertaining to supply of telecommunication services which include access to and use of public telecommunication networks or services
Annex 8C pertains to provisions w.r.t supply of professional services in regulated or licensed occupations including provisions relating to professional standards, recognition of Professional Qualifications, licensing and registration.
Annex 8D sets out provisions relating to Foreign Investment Framework which sets out that the Foreign Investment Frameworks of the Party’s shall not be subject to Dispute settlement under the agreement.
Annex 8E sets out the various Specific commitments and the conditions to which these commitments are subject to, undertaken by India.
Annex 8F sets out the non-confirming measures undertaken by Australia in terms of article 8.9 of the agreement.

Annex 9A sets out Specific Commitments on Temporary Movement of Natural Persons in terms of the provisions of Chapter 9.

Novello Comments

The Government of India has been extremely Proactive in ensuring that India finds it absolutely preeminent position with its Atma Nirbhar. Unlike any other schemes driven by say a Foreign Trade Policy which always comes with a set of Caveats including obligations, a Free Trade Agreement (and AIECTA is one) comes with no such strings attached. While an importer can get the total or partial waiver of the Basic Customs Duty (as long as the Rules of origin conditions are complied with), it is an outstanding boon as the BCD will otherwise become a Tax Cost to the Company. The exporter can have a better conversation with the importer at the other end to boost their level of exports as there is no equivalent to the Basic Customs duty levy at the other end as well.

More importantly, India Inc has for long been dependent on one country for its imports because of various cost constraints. With the waiver of the Basic Customs Duty, India Inc can relook at its supply chain and ensure that dependency on one country (read China) for the kind of goods that are available in Australia as well. With the waiver of BCD, the cost of procurement will come down and India Inc will have a level playing field for their imports. It is also important for Companies to have a back up plan in terms of their Supply Chain Strategy.

We will be more than delighted to have a coffee and conversation with you on this topic. Do reach out to us at [email protected]

The Handshake between the Kangaroo and the Tiger to keep the Dragon at bay. A take on the ECTA between India and the Australia (AIECTA)