Taxing exports of digital movies and games may not be worth sowing discord.
India’s plan to let a moratorium on imposing customs duties on cross-border digital e-commerce transactions expire may end up hurting India’s more ambitious plans to become a global chip leader in the next five years, Reuters reported.
It could also worsen the global chip shortage by spiking semiconductor industry costs at a time when many governments worldwide are investing heavily in expanding domestic chip supplies in efforts to keep up with rapidly advancing technologies.
Early next week, world leaders will convene at a World Trade Organization (WTO) meeting, just before the deadline to extend the moratorium hits in March. In place since 1998, the moratorium has been renewed every two years since—but India has grown concerned that it’s losing significant revenues from not imposing taxes as demand rises for its digital goods, like movies, e-books, or games.
Hoping to change India’s mind, a global consortium of semiconductor industry associations known as the World Semiconductor Council (WSC) sent a letter to Indian Prime Minister Narendra Modi on Thursday.
Reuters reviewed the letter, reporting that the WSC warned Modi that ending the moratorium “would mean tariffs on digital e-commerce and an innumerable number of transfers of chip design data across countries, raising costs and worsening chip shortages.”Advertisement
Pointing to Modi’s $10 billion semiconductor incentive package—which Modi has said is designed to advance India’s industry through “giant leaps” in its mission to become a technology superpower—the WSC cautioned Modi that pushing for customs duties may dash those global chip leader dreams.
Studies suggest that India should be offering tax incentives, not potentially threatening to impose duties on chip design data. That includes a study from earlier this year, released after the Semiconductor Industry Association and the India Electronics and Semiconductor Association commissioned a report from the Information Technology and Innovation Foundation (ITIF).
ITIF’s goal was to evaluate “India’s existing semiconductor ecosystem and policy frameworks” and offer “recommendations to facilitate longer-term strategic development of complementary semiconductor ecosystems in the US and India,” a press release said, partly in order to “deepen commercial ties” between the countries. The Prime Minister’s Office (PMO) has also reported a similar goal to deepen commercial ties with the European Union.
Among recommendations to “strengthen India’s semiconductor competitiveness,” ITIF’s report encouraged India to advance cooperation with the US and introduce policy reforms that “lower the cost of doing business for semiconductor companies in India”—by “offering tax breaks to chip companies” and “expediting clearance times for goods entering the country.”
Because the duties could spike chip industry costs at a time when global cross-border data transmissions are expected to reach $11 trillion by 2025, WSC wrote, the duties may “impede India’s efforts to advance its semiconductor industry and attract semiconductor investment,” which could negatively impact “more than 20 percent of the world’s semiconductor design workforce,” which is based in India.
The prime minister’s office did not immediately respond to Ars’ request to comment.
ARS VIDEO
How Lighting Design In The Callisto Protocol Elevates The Horror
Making the moratorium permanent is also an option
India is joined by South Africa and Indonesia in opposing the moratorium, arguing that developing nations are “facing massive loss in potential revenue,” Reuters reported. Altogether, developing countries have lost an estimated $10 billion in customs duties from exports of digital goods in 2017, an earlier Reuters report showed, and India’s loss alone was estimated at nearly $500 million. Since then, Indian officials have claimed that losses have only increased.
It’s possible that India and other developing nations may seek to narrow the moratorium rather than end it. An Indian government official told Reuters that “these issues need to be discussed and settled” before India can make a decision on whether to extend the moratorium.
In the semiconductor industry groups’ letter to Modi, the WSC pushed the prime minister to ditch plans to oppose the moratorium and instead help world leaders turn the decades-old WTO agreement into a permanent prohibition on “subjecting cross-border data and digital tools to customs duties and procedures.”
A senior adviser on international business at the Center for Strategic and International Studies (CSIS), Meredith Broadbent, agreed. In a post on CSIS’s site, Broadbent wrote that ensuring that “services and digital trade continue to expand and fuel economies and employment” depends on the WTO establishing and enforcing “permanent multilateral digital rules.”
But Broadbent also suggested that “getting a comprehensive agreement which would establish permanent rules for fair and nondiscriminatory treatment in the digital trade sector is probably beyond reach” of the WTO meeting next week.Advertisement
This leaves the global economy in a precarious place should the moratorium be allowed to expire, experts have warned.
Broadbent seemed to suggest that recovered taxes may not be worth it to India. India and Indonesia’s allegedly “expansive outreach efforts” to persuade other countries to let the agreement expire—which is supposedly necessary to recover “growing” customs duties revenue losses—appear to spring from “highly questionable” logic, Broadbent wrote.
Numerous studies, Broadbent said, suggested that developing countries’ revenue losses are low, including a WTO assessment that estimates that “the impact of the moratorium on developing countries’ overall government revenue” is “below 0.33 percent.”
Studies “have repeatedly shown that introducing digital tariffs would slow down digital trade flows in such a way as to largely offset any gains from new customs revenue,” Broadbent argued. “This is particularly true for India, whose opposition to the moratorium runs the risk of shrinking its tax base by severely hurting its most internationally successful industries (e-commerce platforms, entertainment, telecommunications, and computer services).”
On the other hand, should India decide to reverse course and embrace renewing the moratorium suddenly, the WSC told Modi that India’s support would “send a strong signal to semiconductor companies that India is an investment-friendly environment,” Reuters reported.
The WSC appears to be appealing to Modi’s personal commitment to seizing India’s opportunity to lead the world in chip manufacturing. Earlier this year, Modi promised that India would one day be viewed as the ultimate source of advanced chips.
“In the coming five years, ‘Made in India’ semiconductor technology will resonate worldwide,” Modi said. “Every electronic device will contain a chip where some Indian’s sweat will be involved.”
