Free trade agreements (FTAs) help countries export more outside their borders, gain better access to raw materials and vital components, and compete more successfully in the global marketplace. For India and European Union member states, the EU-India FTA faces a tough uphill battle. However, once that battle is overcome, the FTA will increase trade and opportunity between the two powerful regions.
India is an important sales market for Europe; with a population of 1.3 billion it is the fastest growing economy in the world and a key supplier of a wide range of goods and services for many EU partners. Germany, ahead of India’s Prime Minister’s visit to Europe in late May, made a strong pitch for resuming negotiations for the EU-India FTA. Germany is one of many countries that India terminated its bilateral investment protection treaties (BITs) with, following the country’s release of a new BIT model in December 2015.
If the new FTA is finalized, it will help both sides boost trade, create jobs, increase economic growth, and initiate new business opportunities. Companies need to prepare for the complex compliance processes that an FTA will bring when moving goods across these borders.
Overcoming import hurdles and new taxes
Though trade volumes could be higher between the two countries, the EU industry faces high hurdles shipping into India. In addition to the country’s sprawling bureaucracy, the current Indian customs duty is as high as 60 percent in the automotive sector, not to mention the additional import duties and non-tariff barriers such as regulatory standards on these products. Companies are hoping to see a gradual tariff reduction for industrial goods with an approved FTA between the EU and India.
Despite India’s trade minister rejecting the FTA negotiations due to the restrictive environmental and social standards that the EU wants to establish, the Indian government is pushing ahead with one of its largest tax reforms since the country’s independence.
A bill is being put forward to the Indian Parliament for the introduction of a uniform Goods and Services Tax (GST) across the country, which would replace a variety of indirect taxes. Goods and services would face a three-part GST structure that includes federal state GST for federal services, central government GST (CGST), and an Integrated GST (IGST) overriding tax. India’s Parliament is still seeking consensus on this plan, which is supposed to be enforced on July 1, 2017.
For services within a federal state, CGST and SGST would be collected simultaneously, while services between two federal states along with the import of goods and services would be subject to the IGST. When importing goods, the IGST would apply as the customs taxes did previously. Standard GST will be 28 percent, while the rate for machinery and factory products, as well as many services, will be set to 18 percent.
For many companies, tax documentation with the new three-part GST structure will be more complex compared to the current service tax. While the new GST will simplify price and freight calculations, companies will need to adapt their current technology systems and accounting to be able to check their distribution channels and price calculations until GST is introduced.
How Trade Automation Helps
To better manage the intricacies of an FTA, trade automation can improve a company’s compliance and save money in the long run. Global Trade Management (GTM) solutions like Amber Road offer more than just international trade compliance-they integrate global sourcing, risk management, logistics, and trade compliance processes providing holistic and digital supply chain visibility.
The new GST will accelerate the demand for automation, and with the right GTM in place, India’s complex import and tax regulations will be more cost-efficient and better managed. The best GTM can help with product classification, allocation of customs tariff numbers, maintenance of master data, collection and administration of origin certificates, and sanctions list checks. It can highlight what documentation is necessary for import into India and calculate duties, taxes and other charges to create a total landed cost.
By automating FTAs with solutions that rely on in-house sourced, country-specific regulatory trade content that is gathered, interpreted and updated daily by seasoned trade professionals, companies can plan, optimize and execute all aspects of global trade more efficiently and effectively. In addition, GTM systems can automatically document and archive all foreign trade processes for internal and government audits.
Select GTM solutions offer the most comprehensive and robust databases of global trade content, government regulations, and international business rules available. Amber Road, for example, covers over 147 countries (roughly 95 percent of world trade!) making its trade content and content management processes through Global Knowledge® tightly integrated within the suite of GTM software.
As trade with India continues to grow, EU and global companies will face expensive, varied tariff and non-tariff trade barriers. While waiting for the final negotiation of the EU-India FTA and the gradual dismantling of tariffs, companies can prepare to automate legally-compliant, export and import processes with GTM solutions to be ready to capture the huge market opportunity that India offers.
This post was published on June 16, 2017 and updated on September 11, 2017.