India-UAE CEPA is touted as the ground-breaking agreement in delivering India’s strategy to adapt to an increasingly complex and fast-changing environment by strengthening the economy and driving the global post-COVID-19 recoveries through international trade. According to experts, CEPA will not only facilitate the free flow of goods, services, capital, technology, and people but will also propel the two friendly nations towards magnificent bilateral and economic relations. Our recently conducted webinar, India-UAE CEPA: Exploring Opportunities to Boost Trade, offered insights into all the intriguing aspects that emphasize the importance of this agreement and prepare Indian companies to explore newer opportunities…
India and the United Arab Emirates (UAE) have been trading partners since the beginning of the early 1950s. UAE has always been one of India’s largest and most important trading partners. The historic CEPA with UAE was inked on 18 February 2022 and is India's first complete free trade agreement to be signed with any country in a decade. The negotiations between India and UAE were concluded in a record span of 88 days, and CEPA was operationalized w.e.f. 1 May 2022.
The CEPA has been executed with numerous objectives and initiatives. One of the primary objectives is to increase the bilateral non-oil trade to US$100 billion in the next five years between the two participating countries. India-UAE CEPA is a comprehensive agreement with 18 Chapters covering Trade in Goods, Rules of Origin, Trade in Services, Technical Barriers to Trade (TBT), Sanitary and Phytosanitary (SPS) measures, Dispute Settlement, Movement of Natural Persons supplying services, Telecom, Customs Procedures, Pharmaceutical products, Government Procurement, IPR, Investment, Digital Trade and Cooperation in other Areas.
The CEPA between India and the UAE covers almost all the tariff lines dealt in by India (11,908 tariff lines) and the UAE (7,581 tariff lines), respectively. India is expected to benefit from preferential market access provided by the UAE, covering over 97% of its tariff lines, which account for 99% of Indian exports to the UAE. India will also offer preferential access to the UAE on over 90% of its tariff lines, including lines of export interest.
With regards to trade in services, CEPA contains legal provisions to regulate cross-border trade in services and offers service providers an open and non-discriminatory environment for cross-border trade. Service providers in the UAE have offered market access in around 100 sub-sectors of the UAE, while Indian service providers will have access to about 111 of the UAE sub-sectors.
According to Mr. Abhishek Singhania, Director (Customs & International Trade), BDO India LLP, since the CEPA is more exhaustive than other FTAs, it covers different aspects of business between the two countries which include:
Provides Sanitary and Phytosanitary measures to protect human, animal, and plant life or health and strengthen communication, consultation, and cooperation between two nations.
Establishes a robust legal framework on technical regulations, standards, and conformity assessment procedures to ensure the smooth flow of trade in goods.
Prevent unjustified trade barriers, enhance transparency, encourage the development and adoption of science based international standards, guidelines, and recommendations, and promote their implementation by the parties.
Establishes a framework to promote consumer confidence in digital trade and foster an environment conducive to advancing digital marketing, including e-commerce and the digital transformation of the global economy.
Stringent Rules of Origin for strict monitoring of trade flows between two nations to prevent circumvention of products from other countries. The agreed rules are based on compound criteria of change in tariff classification (CTC) of the good plus a minimum percentage value-added.
Clear rules on audit, certification, and import checks have been established to ensure that standards, technical regulations, and conformity assessment procedures do not create unnecessary barriers to trade between the two nations.
Issuance of customs rulings before import, facilitating cross-border clearance for economic operators, and adopting international best customs management techniques.
The Agreement also focuses on technical regulations, standards, conformity assessment procedures, marketing authorizations, notification procedures, and inspections relating to Good Clinical Practices (GCPs) and Good Manufacturing Practices (GMPs) for manufacturers of pharmaceutical products affecting trade in pharmaceutical products.
The Central Government vide Notification No. 39/2022-Cus (NT) dated 30 April 2022 has notified the Customs Tariff (Determination of Origin of Goods under the Comprehensive Economic Partnership Agreement between India and the United Arab Emirates) Rules, 2022, effective from 01 May 2022 providing for origin criteria to be met for claiming preferential treatment under India-UAE CEPA, i.e., wholly obtained criteria or product-specific value addition criteria.
Vide Notification No. 22/2022- Cus., dated 30 April 2022, the Central Government has notified concessional rate of duty for goods imported availing the benefit of India-UAE CEPA, giving effect to the first tranche of the CEPA.
India-UAE CEPA specifically provides applicability to Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (“CAROTAR, 2020”). The said Rules aim to supplement the existing operational certification procedures prescribed under different trade agreements. A Certificate of Origin is the most valid proof of fulfilling the origin criteria. An importer intending to claim a preferential rate of duty under the CEPA shall be required to make a necessary declaration in the bill of entry that imported goods qualify as originating goods under the CEPA. Indicate details like tariff notification for preferential rate, certificate of the original reference number, date of issuance of the Certificate of Origin, originating criteria, transportation details, etc., in the Bill of Entry.
Let’s hear it from experts as to how the two countries can benefit from the agreement…
Mr. Krishna Barad - Partner (Customs & International Trade), BDO India LLP
Kindly enlighten us on the objective of CEPA and how will it impact various sectors in terms of imports and exports?
The objective of India UAE CEPA is to grant greater market access to both countries. Both the economies as well as both the government agencies are working as trade facilitators. Today there is greater understanding because of the other registration as well as participating government agencies' documentation, which has been considered the same. There are other sectors such as chemicals, wherein the goods fall in chapters 28, 29, and some more, so the arrangements will also be available for other sectors, including the most prominent gems & jewellery sector because a majority of the manufacturers of gold items and gems & jewellery import the gold from UAE and government has already given the reduction in the customs duty at one percent where the importer has some specified requirements to turnover limits and some already allocated tariff quota and I am sure that this partnership will also pave the way to boost the trade. The key lies in the agencies acting as the trade facilitation rather than being regulators to regulate and control the inward and outbound traffic between both economies.
What is the value that it adds to a country's valuation like transactions or the framework?
Any fruitful agreement is based on the rules of origin criteria as laid down under the trade facilitation agreement executed by the WTO wherein there are over 150 member countries. Whenever the FTA agreements are executed, the rules of origin form part of the legislation, and the customs notification or the customs law in the respective countries lays down the major framework so that there is no dispute at the latter stage and there is proper compliance when the imports and exports are happening between the member countries.
Typically, since the FTA grants market access and trade facilitation, there are certain guidelines wherein the FOB value of the goods is considered for rules of origin criteria. This is one methodology. There could be the culmination of methods as well, which means if some imports are made, if I am a manufacturer in the UAE and I am importing certain goods from India, I will say that I have some bill of material out of some five items, I am importing one item from India and then I will have to do the manufacturing and overall manufacturing direct labour cost as well as other ancillary charges put together and my sale price in terms of the FOB value, there has to be a delta of minimum 35 to 40% value addition, in the sense of my raw material cost is 70 and another 30 is my other cost including the profit and the manufacturing cost overheads, etc., That makes my value or the sale price 100. Then obviously I have to sell that product at 135-140 US dollars per unit or per SKU, then this will be considered as a beneficial transaction or bonafide transaction to meet the threshold of FTA guidelines as well as the custom duty benefits and the exemptions as laid down in the rules of origin criteria.
Again, it is subjective and is between member countries basis the agreement as well as the strengths, weaknesses, and the very product because this 40% value addition criteria is not there across the board or all the sectors if it is gold and gems & jewellery sector, for example, the value edition criteria are mentioned as 3% because you cannot have 40% value addition in the gems & jewellery sector. The broader guideline is that there has to be a change in the tariff classification between four to six digit levels. That means if the products are traded from India to UAE or vice versa or any other economies, the tariff classification is considered as one of the bonafide nomenclatures or criteria to consider that this product is eligible and considered as a manufactured product, not a traded product to meet the specific requirements under the rules of origin for treated agreements.
There are certain commodities, which are still due to get the sectoral priorities, and these are still imported or exported from other countries, and they are being shipped from either UAE or India also, will they and how will they qualify for any FTA benefits or the third-party invoicing and shipments?
India already has almost 16 treaties and agreements with other economies, especially Southeast Asian countries as well as North American countries. While this has been an advantage for the importers as well as exporters, a few years ago, the agencies reported the misuse of FTA benefits. To have strict scrutiny, the government introduced certain governing rules to strengthen compliance with the treaties & agreements, in the 2018 Union Budget. Under this, there are greater requirements in terms of the monitoring and as well as inflow of goods from FTA countries. That is one side of the law.
The second side is that now especially if we see the Middle East as a strategic location for trans-shipment of goods from across the world. Salalah port in Oman is considered the largest transshipment hub for the goods movement for the global trade. The Middle East, over a while, has created large capacities in the form of free trade warehousing zones, which are proving to be major trade hubs, and obviously, there is greater flexibility, tax exemptions, etc., that come along with it. There has to be proper adherence whenever the trans-shipment or third country invoicing happens. The exporters and the importers have to be mindful that they are meeting the criteria to provide or get the certificate of origin as prescribed under the respective treaties & agreements and there is proper data flow as well as proper disclosure in the transactions.
They have to lay down the ground rules that simply goods coming from UAE or shipments made from UAE will not qualify for the concessional duty benefit under the India UAE CEPA and, every sourcing person as well as customs and other stakeholders, especially in the movement of the goods, have to be very thorough into an understanding of the legislation between India and UAE. The customs regulations need to be evaluated thoroughly so that there is no compliance challenge at a later stage to avoid all the fines, penalties, or litigations including the brand reputation. In short, every company must follow the law of the land.
What happens if you have a huge packing list of a hundred commodities or even bigger commodities, 95% of them under the purview but only 5% of the commodities are not under preview, but they are in the same invoice packing list and probably in the same container, how would the imports be made?
Whenever any import takes place into the country, there are three documents required – invoice, packing list, and transport document in the form of a bill of lading or airway bill or courier web. This is the nature of the shipment. As the next step when the custom broker is creating a custom declaration, we call it a custom declaration to file the shipment for the customs clearance, which is interfaced with the customs electronic gateway (ICEGATE). There is an opportunity and provision in the customs declaration system that the declaration can be filed line item wise, entailing that if the company’s invoice runs into 500 line items, then the company can file the individual line items because there will be unit rate as well as a unit of measurement. It is the job of a customs broker as well as the instruction has to flow from the importer to communicate specifically about these 500 line items.
Out of 500 line items, which ones are made in the UAE, which also depicts the country of origin as UAE, and the rest items are of the different countries of origin. It is the shipper's job also, if he is a trader, to be mindful that he is putting the respective item wise country of origin so that the importing country, on both sides, files the custom declaration accordingly and legitimately because if in case, the package is cross-checked and opened by the respective customs duty officer and he finds that the goods are made in China and not in UAE, it will attract lawsuit, litigation, penalties and ultimately loss of brand equity.
What are the precautions and compliance norms that need to be adhered to by exporters and importers for this benefit?
The mindset or the thought process is to always see the benefit without getting into the readiness or the acumen to have greater trust in the compliances. Indian customs operations are 100% digitalized, which helps in reducing timelines. Another aspect is that because of digitalization, the goods are self- assessed by the system itself, which also lays down a greater onus on the importer as well as exporters. This essentially means that the disclosure data filing information punched by the exporter or the importer or his customs broker is hardcoded in the system and then the government has the provisions to carry out the post clearance audit and there is a legislative change also, which has been brought in the customs law to arrest the non-compliance through post clearance audit. There will be a greater thrust on the importer as well as exporters to have the data availability and when customs demands a particular data, they should be ready to retrieve the data and submit it for further due diligence. Whenever such agreements are signed, there is an understanding between both the agencies that they will exchange the data whether through government formal channels or the importers as well as exporters so that there is no revenue leakage and there is proper monitoring of the trade inflow and outflow between both the economies.
Mr. Amb. Dunston P - Chief Operating Officer, The Royal Office of HH Sheikh Ahmed Bin Faisal Al Qassimi, UAE
How can both the countries leverage CEPA and what are the immediate benefits of this partnership that you envisage?
UAE is the third largest trading partner with India, so India is going to benefit from the preferential market access provided by the UAE on over 97% of the tariff goods, which accounts for 99% of Indian export to the UAE in terms of value and more important, particularly from labour-intensive sectors like textile, leather, footwear, sports goods, plastics, furniture, and engineering products. So, the advantage is not only in terms of economy but also because these are all coming from labour-intensive industries, the job creation is also going to be phenomenally high for the Indian segment. Secondly, in the gold and jewellery sector, India will benefit from easier access to UAE through changes to the customs duty. It will mean that Indian made jewellery, which is predominantly what is being sold in UAE, can be brought to UAE at competitive rates. The current duty is about 5%, which is going to be reduced. It should also help the jewellery industry operate out of India.
On the pharma side, the UAE, for the first time, has agreed that medicines or medical products approved by India will get market access and regulatory approvals in a time-bound manner, that is maybe around 90-days, which is currently taking more than six to eight months for an approval for a drug to be introduced in the market. For India, it will give market access to entire West Asia and Africa in all the above products basically because expanding the product range from UAE to the world is much easier than sending materials from India, so it offers a perfect gateway for the Indian products to get to the global market as well because most of the buyers are coming and buying it from the UAE market. For UAE, it would entail enhanced market access to India for its key exports such as petrochemicals, metal, and dates, in addition to the other normal products, which are currently being exported to India from UAE. With India projected to become the world's third-largest economy in the next decade, opportunities for UAE companies in the oil and non-oil sectors are going to be phenomenally high and benefit both countries.
I just want to mention one more thing because all along we have been talking about CEPA, only about the commodities and products, but CEPA also covers 11 service sectors and more than 100 subsectors like the real estate, advertising, telecom, construction, education, financial, travel, tourism, entertainment, sports, and transport. So, it also gives leverage and helps these industries to share knowledge and improve upon their services. India - UAE CEPA is the trade deal executed within the shortest time, which is the true reflection of faith between two trade partners, keeping the trade alive for mutual benefits.
What is the significance of this trade agreement to UAE given that India's petroleum import bill is the largest single import item?
There are more than 6000 foreign companies currently manufacturing products in this country and it is ever evolving. Every day we are getting requests from various global companies to set up their activities here. Now if you see the size of the non-oil trade exchange between UAE and India, it was almost about 45 billion dollars in the year 2021, which is immediately after the Covid-19 pandemic, which is a 60% jump from 2020. India accounts for about 14% of the total non-oil export of UAE to the world. When so many companies are being available in this country manufacturing various goods, it allows multi-brand and with this agreement, these brands have got the potential to enter the Indian market. For example, a simple product such as mineral water, there are plenty of plants available today in this country, natural water coming from Holland, Hungary, you name it, it's there. So, there are immense opportunities for brands to get into the Indian market, which allows the Indian people to have the luxury of having different brands, which can help not only in terms of availability of quality products but also in terms of the price benefits because when there is stiff competition, prices also become competitive. Secondly, Indian consumers will have varied options to select from for their requirements. India is the largest trade platform for UAE and that is only going to go up. CEPA is expected to increase the total value of bilateral trade in goods to over US$100 billion and trade in services to over US$ 15 billion within five years.
Do you see a very concerted effort from the UAE Government in that direction that there will be a very certain and niche development with India as a part of the partnership in terms of very specific commodities or manufacturing sectors getting any leeway locally?
Let’s talk about the pharmaceutical industry; we are coming up with a project called the pharma city, which will spread over 200 acres of land where we are planning to bring in as many pharmaceutical companies across the world to come and manufacture their products in this country, especially after Covid-19, the healthcare sector has been getting special attention from all quarters for almost all the countries and we, as a country, are looking at health sector in a very big way. We want to make sure that the medicines that are manufactured or are made available to the global market especially today if you see, most of the African markets don't have the facility to reach out to common medicines, so we want to ensure they can get these products. We are planning to bring global brands from India. We have already received so many inquiries and 2-3 companies have already signed up for starting manufacturing facilities here.
Once that happens, India is also going to get benefited immensely because the global brands who are going to manufacture the medicines here, will be able to export these medicines to India as well. There is going to be an opportunity created for this industry both for India as well as the UAE.
The Pharma sector in India is touted as a major beneficiary of CEPA owing to the bilateral corporation for the pharmaceuticals. What exactly does this mean for the Indian pharma industry and how is going to be benefited from this announcement?
This bilateral agreement between India and UAE, as a part of CEPA, will facilitate the Indian pharma products into the UAE market in a time-bound manner. I have worked closely with the Department of Commerce while making the draft version and negotiations with the UAE officials. To derive a decisive agreement, we analysed the current share of the Indian pharma industry in the UAE market, and we realized that as compared to Western pharma products, our share in the UAE is relatively low. One of the reasons is the longer timeframe required by the regulatory agencies for Indian pharmaceuticals to enter the market.
Unlike any other commodities, for pharmaceuticals, once the entrepreneur has set up a manufacturing facility, he cannot immediately start exporting a pharma product into any country. He has to go through the regulatory procedures and that's the first step for marketing or exporting any pharma product into the country. Here itself, every Indian company is going through a long-run process of the regulatory regime by the agency. We attempted to reduce the timelines and identified the steps that can be done away with to ensure fast tracking of approvals.
Once the application for the registration is filed, the first step is the inspection of the facility and post that usually the agency would do the complete dossier assessment or the compliance review of the dossier and after satisfying these two conditions, Market Authorization is given to that company to export that particular product into the market. As part of the CEPA agreement, the UAE has agreed to waive-off inspection of the manufacturing facilities located in India provided they have the approvals for those facilities by the stringent authorities of six countries namely the US, EU, UK, Australia, Canada, and Japan. Secondly, for the dossier evaluation, the UAE has agreed to waive off the complete assessment cycle as they would count on the assessment procedure followed by these six countries, and ultimately, they have agreed to reduce the timelines to 90 days for the grant of one particular product, which earlier used to take more than one year.
These changing paradigms are going to facilitate the Indian companies for the faster entry of those molecules into the markets. Another important point we have noticed is that earlier the UAE Government used to insist on the marketability of a particular pharma product in at least any of the two developed countries, such as the UK and the US, but now under CEPA, the UAE has also agreed that if that particular pharma product is approved in any one of the countries, they will directly allow the access to that product into the market. So, we were able to cut down quite many procedural challenges that the industry was facing for quite a long time.
I must say that this is the first of its kind cooperative agreement in the pharmaceutical space that India has signed with any country. It has paved the way for India's continuing negotiations in the pharma sector with other agencies and I am so pleased to mention that even Australia has taken a step ahead for such a bilateral agreement. Right after the UAE's negotiations, the Commerce Ministry started negotiations with Australia on similar provisions. We've received a positive response and we are moving ahead with a similar kind of proposal with the UK, EU, and Canada, wherein we are working with the concerned agencies in terms of facilitated access for Indian pharmaceutical companies.
Kindly highlight the impact of Covid-19 on the procedural landscape.
As far as the pharma sector is concerned, during the Covid-19 pandemic, there has been a lot of fast-tracking of procedures in place not just in the bilateral trade agreement, but in terms of the regulatory approvals as well. The widely used term across the globe in the last year, Emergency Use Authorization (EUA) of the Covid-19 vaccine, has been the result of such fast-tracking mechanisms only. Government agencies, health ministries, and even regulators globally have realized the emergency need for the availability of medicines for combating the Covid-19 crisis. They have taken these facilitated measures or accelerated approval processes. Covid-19 has hit the world in terms of the availability of medicines because of the ensuing supply chain disruptions, which has prompted the policy makers towards indigenizing pharmaceutical requirements for the respective countries. Today every country is working towards strengthening the local manufacturing capacity of their pharmaceutical requirements. One most important aspect that warrants our attention is that developing a pharmaceutical facility is a long-drawn process, requiring technical know-how besides getting the elementary approvals and regulatory compliances in check. Instead of this, there should be some alternative mechanism to immediately address the requirements of the medical needs of the country and there exactly such bilateral trade agreements enhance the accessibility of these medicines, especially the essential medicines or even to some extent the APIs – the basic raw materials needed for these formulations. In that sense, even the bilateral trade agreements have gained pace.
What does this partnership mean for the Indian SMEs?
It’s a very important point of discussion at this point wherein a lot of SMEs are aiming to enter the international market. While we might only hear the mentions of global pharma leaders in international markets, such as Dr. Reddy’s or Aurobindo Pharma, their backward linkages have been closely associated and integrated with the Indian MSMEs. In most cases, the pharma giants’ CRAMs (Contract Research and Manufacturing) have been assigned to the SMEs. One of the studies clearly shows that 90% of the domestic pharma market has been catered to by the MSMEs and the majority of the export-related trade has been taken care of by the large-scale units and even in the export, the study clearly shows that 50% of the exports are having some contribution from MSMEs, either through the contract manufacturing or outsourcing. Having said that, it's also a fact that MSMEs are confining their export positions into the rest of the world market, measurably Africa and ASEAN. The India-UAE CEPA agreement has given the tariff concession for more than 100 pharma products and majorly on APIs, which will be a great boost for both large companies as well as MSMEs.
With the planned pharma city in the UAE, which is slated to cater to the needs of the African market and other GCC markets, MSMEs are going to have greater market access to the UAE. A lot of talks are underway to have technology transfer from the Indian pharma companies. All in all, it’s a great opportunity for the pharma sector.
We have been facilitating many SMEs through various incentives and business-friendly schemes and year on year, we are seeing a huge jump in terms of the number of SMEs getting into the international market. This agreement would further enhance their strength in the international market and make them more competitive.
Mr. Sanjay Leekha- Founder & CMD, Alpine Group, Chairman, Council for Leather Exports (CLE), India
In terms of the diversification of our export product portfolio, what does this mean from a partnership?
The US has been a substantial market for us. Almost a quarter of our exports have been going to the US. On the other hand, the EU, all put together, almost accounted for half of India's exports. Between the US and the EU, we have close to three-fourths of our exports. 77% of our exports are directed in that direction. West Asia, North Africa, and the rest of Africa have only accounted for about 6% of our total exports. The scope to take this up is tremendous.
I feel that the FTA that has been signed with the UAE, opens up a lot of doors for us, be it the African market, and is a gateway for the balance of GCC countries. It is, in fact, also a gateway for exports into Russia and certain parts of Southern Europe. So, the potential to make this business grow is huge and I think with the FTA and the reduction of duties, our competitiveness has increased tremendously. There's a huge market waiting to be tapped for the Indian footwear industry, especially in the UAE. That is something that we are all looking at taking on a much larger scale. Our industry was present in quite a large number at a recent show in Dubai and every industry member felt that we now need to look at the UAE as a potential market and not just as a route into other markets and I think that's the direction that we are taking, and I am extremely optimistic about the promising development.
This is a time when there are a lot of opportunities to attract FDI into India in all sectors. Even in the manufacturing sector, with this partnership with the UAE, I think those doors can open up and a lot more partnerships could get created. Our business-friendly policies have led to this improvement in the ease of doing business. I also believe the services sector can hugely benefit from this agreement. The current export of Leather, Leather products & footwear from India to UAE is not very substantial. However, with CEPA, the potential to make this grow is now attainable. I expect that in the next 2-3 years, we will see major growth in the Leather sector export to this destination. I also expect to see new partnerships being created in our sector between stakeholders on both sides.