On the horizon

  • Saarc member states have to work persistently to establish a free trade area and a customs union
- Rup Khadka
On the horizon

Nov 25, 2014-

All Saarc member states levy customs duties, which constitute of import and export duties. While exports duties are levied only on a few specified items, import duties are collected from all goods, except those that are exempt under law. Member states of Saarc countries have adopted the Harmonised System of commodity classification to define goods by reference to a Harmonised System-based code number. In principle, they have agreed to follow the World Trade Organisation (WTO) valuation system, which focuses on the transaction value of imported goods, which is the price actually paid or payable. 

Rates harmonisation 

The eight nations levy customs duties largely on an ad valorem basis, which is expressed as a percentage of customs value. They also levy specific rates on some items, which are fixed on some kind of physical unit of goods, such as a metre, litre, kilogram, gallon, or stick. However, some items are subject to both specific and ad valorem rates, where the higher rate is the effective rate.

The number and level of import duties vary considerably in the region. For example, Sri Lanka levies only three rates of import duties: 7.5, 15, and 25 percent. There are four rates in Bangladesh (2, 5, 10, and 25 percent); five in Bhutan (10, 20, 30, 50, and 100 percent); six in Nepal (5, 10, 15, 20, 30, and 80 percent); 10 in the Maldives, ranging from 5 to 400 percent; 13 in Afghanistan, varying from 1 to 50 percent; 14 in Pakistan, ranging from 5 to 100 percent; and 22 in India, ranging from 3 to 150 percent. Thus, there are huge variations in numbers as well as lowest and highest rates of customs duties in Saarc countries. 

At the global level, attempts are being made to reduce the number and level of import duties and harmonise them in the economic unions to minimise distortions created by these duties. It is to be noted that import duties are considered economically inefficient since they increase the cost of doing business and place a heavy burden on consumers. As import duties are also levied on raw materials, auxiliary raw materials, chemicals, equipment, machinery, and other intermediate goods, they increase the cost of doing business. Customs duties levied on imports, including the import of finished goods, also have a pyramiding effect due to the application of percentage mark-ups on tax inclusive prices by vendors at different stages, where the tax-induced rise in price is higher than the amount of tax. Export duties make domestic products less competitive in the international market. It is, therefore, desirable to rely less on these duties as revenue generators or to protect domestic industries.

Customs union

In Europe, a Customs Union was created on July 1, 1968, which now has 28 members. No tariff or non-tariff barriers exist in trade between the member countries. Goods move freely within the union. They levy common external tariffs on imports from countries outside the union and have adopted a common Community Customs Code, which ensures the uniform implementation of customs duties by the authorities of all member states. They have also adopted the Harmonized System. They follow the WTO valuation system for the determination of customs duties. This is also the case in the five-member East African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda) where member states have abolished internal tariffs. They levy a common external tariff, have adopted a common customs law, and harmonised system of commodity classification, and the WTO valuation system. 

Trade agreements 

As for Saarc, the South Asian Preferential Trade Agreement (Sapta) was a stepping stone in creating a free trade area in the region. In December 1991, the sixth Saarc Summit approved the formation of an inter-governmental group to formulate an agreement to establish a free trade area by 1997. Sapta was signed in April 1994 and entered into force in December 1995. The agreement intended to promote and sustain mutual trade and economic cooperation within the region through the exchange of concessions and negotiations through step-by-step tariff reform by taking into account the special needs of least developed countries.

Currently, Saarc nations provide preferential treatment to some items imported from other member states and preferential treatment is provided on the basis of certificates of origin issued by an authorised agency of the contracting state. Items included in the sensitive list are subject to standard rates. 

The South Asian Free Trade Area (Safta), which the 16th session of the Council of Ministers agreed to initiate in December 1995 went a step further. An inter-governmental expert group was created in 1996 to identify the necessary steps to envision a free trade area. In 1998, the 10th Summit decided to set up a committee of experts to draft a comprehensive treaty framework to establish free trade areas within the region. The Safta agreement was signed during the 12th Summit on January 6, 2004, and came into force on January 1, 2006. The first round of customs reduction was targeted for July/August 2006 and it planned for completion by January 2016. As in the case of other regional intergovernmental organisations—the EU and East African Community—Saarc also ultimately strives to create a free trade area/customs union in South Asia and a South Asian Economic Union.

Work to do 

International experience indicates that under a customs union, member states dismantle all tariff and non-tariff barriers for regional trade.They levy common external tariffs on imports from countries outside the union, adopt a common customs code, which ensures the uniform implementation of customs duties by all customs authorities, and the Harmonised System of commodity classification and follow the WTO valuation system to determine customs duties. Members of the Economic Union also initiate harmonisation of other taxes. Saarc member states have adopted the Harmonised System of commodity classification and WTO valuation. They have reduced import tariffs that apply to trade between member states but will have to work persistently on other measures in order to establish a Saarc free trade area/customs union and a South Asian economic union. There is still a long way to go. 

Khadka is an economist

Published: 26-11-2014 12:44

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