The Comprehensive Economic Cooperation
Agreement: Strengthening India-Singapore
With the signing of the Comprehensive Economic Cooperation Agreement (‘CECA’) between India and Singapore recently, the two countries have moved towards even closer economic ties. This article seeks to encapsulate the key features of the CECA, and briefly touch upon some of the implications for Singaporean investors in India and vice-versa. The CECA is effective from 1 August 2005.
The Route to the CECA
The route to the signing of the Comprehensive Economic Cooperation Agreement between India and Singapore began with the signing of the Declaration of Intent on 8 April 2003 by the respective representatives of the Singapore and Indian ministries, witnessed by then Prime Minister of Singapore, Mr Goh Chok Tong, and then Prime Minister of India, Shri Atal Bihari Vajpayee. Of course, even the signing of the Declaration of Intent had been preceded by the study of the Joint Study Group (set up in April 2002) on the CECA, which was to be the framework for subsequent negotiations.
Negotiations began on 27 May 2003 in New Delhi. After 13 rounds of negotiations, and nearly two-and-a-half years, India and Singapore successfully concluded the CECA, signed on 29 June 2005, during Prime Minister Lee Hsien Loong’s state visit to India.
The CECA encompasses agreement between the two countries on a wide range of trade relations: trade in goods, trade in services, investment protections, and other features such as Mutual Recognition Agreements which will eliminate duplicative testing and certification of products in specific sectors, and cooperation chapters which will encourage and facilitate bilateral cooperation in several sectors. A key feature of the CECA is the improvement to the existing Avoidance of Double Taxation Agreement (‘DTAA’) between India and Singapore.
Key Features of the CECA
Trade in goods
The Chapter on ‘Trade in Goods’ includes the exchange of tariff concessions that would make goods from Singapore more competitive vis-à-vis other foreign imports into India.
The tariff lines in India have been categorised into four lists: Early Harvest, Phased Elimination, Phased Reduction and the Negative list. These three lists cover about 80 percent of Singapore’s present exports to India. Out of these, 506 products have been identified in the Early Harvest list. Imports from Singapore on these would become duty free immediately upon entry into force of the Agreement. For the products in Phased Elimination, basic customs duty would be brought to zero in a phased manner from the date of entry into force of CECA up to 1 April 2009. Similarly, for the products in the Phased Reduction list, Singapore would be offered a margin of preference each year from the date of entry into force of CECA up to 1 April 2009.
Singapore already has zero customs tariff on all products except six and has agreed to bind all their tariff lines at zero customs duty for India, including beer.
Rules of origin
Rules of Origin (‘ROO’) deal with the criteria for grant of originating status or the ’nationality’ of goods produced or manufactured in both the countries for giving preference in customs duty. Under the ROO, simultaneous application of the three criteria, viz Change in Tariff Heading (‘CTH’) of all imported raw materials along with Value Addition of 40 percent and certain sufficient manufacturing operations to be performed for grant of originating status has been agreed to. Certain exceptions have been recognised for certain products including mostly chemicals, machinery and precision instruments.
The Customs Agreement deals with trade facilitation issues to ensure the smooth movement of goods between the two countries. Both Singapore and India will undertake customs compliance activities at the time of entry normally not exceeding five percent of the total customs transactions.
Under the CECA, the respective customs authorities would provide Advance Rulings on the eligibility of originating goods for preferential tariffs and tariff classification, upon request. An understanding has also been reached on sharing of information in cases where there is reasonable suspicion of circumvention of rules for under-invoicing/over-invoicing.
Mutual recognition agreement on conformity assessment
CECA provided a framework for the entering into of Mutual Recognition Agreements (‘MRAs’) on Standards and Technical Regulations, Sanitary and Phytosanitary Measures. These would provide for the recognition of Standards and Technical Regulations on goods by the regulatory authorities of both the countries in certain identified sectors, thereby eliminating duplicative testing and certification of products.
The sectors identified for MRAs are: (a) food products (egg, poultry, milk and milk products, and packaged drinking water); (b) electrical and electronic equipment; (c) telecommunication equipment; and (d) drugs and pharmaceuticals. The MRAs in food products would be implemented immediately, while the MRAs in electrical and electronics, telecom, and drugs and pharmaceuticals would be implemented within 12 months of entry into force of CECA. The Chapter also makes provision to expand the MRAs in other sectors in the future.
The Chapter on Investments aims to promote and protect investments from both countries. It covers a broad range of investment instruments, such as movable and immovable property and other property rights; shares, debentures and similar interests in companies; intellectual property rights and goodwill as well as business concessions conferred by law or under contract.
India has agreed to grant pre-establishment National Treatment on a positive list basis. India has taken commitments in 22 divisions, such as manufacture of food products, textiles, apparel, paper, chemicals, radio, television and communication equipment and apparatus, motor vehicles, trailers and semi-trailers, as well as development of township, housing, built-up infrastructure and construction development projects etc.
Singapore has taken commitments on a negative list basis. Except the following sectors – beer and stout, cigars, drawn steel products, chewing gum, bubble gum, dental chewing gum or any like substance, cigarettes and matches – all manufacturing sectors are included in this offer.
Both parties are ensuring to investors of the other party, the free transfer of their capital and returns from any investments (including profits, capital gains, dividends, royalties, licence fees, interest etc).
In order to foster greater confidence amongst investors, in the event of a dispute between the investor and the state, the dispute would be taken to an international arbitration tribunal, such as International Centre for Settlement of Investment Disputes (‘ICSID’) or arbitration under the rules of the United Nations Commission on International Trade Law (‘UNCITRAL’).
Import of capital goods in India is allowed at preferential tariff in certain specified infrastructure projects. However, an exemption from tariff for import of capital goods, excluding consumables, for the purposes of infrastructure projects in India, would be considered on a case-by-case basis.
Trade in services
The general approach followed in taking commitments under CECA is in line with the Request-Offer process – both India and Singapore had placed requests on each other for commitments in various service sectors. In the schedule of Specific Commitments, India has offered commitments in a wide range of Service sectors in response to Singapore’s request.
India has taken commitments in nine sectors while Singapore has taken commitments in 12 sectors. Sectors offered to Singapore are Professional Services (including accounting, taxation [advisory only], architecture, engineering, medical and dental, services by nursing, midwives etc, and veterinary services), Computer and Related Services, Research and Development Services, Real Estate Services (for consultancy), Rental/Leasing Services without Operators, Other Business Services (such as advertising services etc), Telecommunication Services, Construction and Related Engineering Services, Distribution Services (wholesale trade and commission agents services), Financial Services, Health, Tourism, Recreational, Cultural and Sporting Services, Maritime Transport Services and some sectors of Air Transport Services.
Singapore has taken commitments in all the 12 service sectors and offered partial/full commitments in all the service sectors in which India has offered commitments. The other sectors in addition to those India has offered commitments, contained in Singapore’s schedule of commitments include: legal (for consultancy) services, under Other Business Services; areas such as market research and public opinion polling, retail trading and franchising, under Distribution Services; Education Services; Environmental Services; and Health Services.
In the schedule of commitments for Financial Services sector, India has agreed to allow three Singaporean banks viz, Development Bank of Singapore Holdings, United Overseas Bank Limited, and Overseas Chinese Banking Cooperation Limited to establish 15 branches in four years. India has also agreed to commit to Singapore the FDI limit of 74 percent in banking, both FDI and FII put together, subject to the limitation of ‘one mode of presence’. Further, India has agreed to accord the same treatment to wholly owned subsidiaries of Singaporean banks as it does to its banks on branching, places of operation and prudential requirements.
The present ceiling of ownership of ten percent of the paid up capital of equity in Indian companies shall continue to apply for all Singaporean companies. However, Temasek and Singapore Government Investment Corporation shall be allowed to invest up to a maximum of ten percent each in Indian companies aggregating to a total of 20 percent of the paid up capital.
Further, asset managers established in India or Singapore are now permitted to invest US$250 million in equities and instruments in the Singapore Stock Exchange, over and above the existing cap of US$1 billion allowed for all mutual funds put together. Singapore has also agreed to grant Qualified Full Banking privileges to three Indian banks with or without operations in Singapore (which are yet to be named).
India and Singapore have reiterated their rights and obligations under prior agreements, recognising the importance of air connectivity for expansion of tourism and trade. The Agreement provides for the two countries to meet in the future for bilateral air services consultations to expand the current air traffic rights.
Movement of natural persons
The Chapter on Movement of Natural Persons facilitates temporary entry for four categories of business persons from India and Singapore: business visitors, short-time service suppliers, professionals (in 127 specific occupations), and intra-corporate transferees, for various periods between one month up to three years. However, this Chapter does not apply to measures regarding citizenship, residence or employment on a permanent basis.
With the commitment to promote a liberalised environment for electronic commerce, Singapore and India have both granted national treatment to digital products manufactured in either country. The chapter also envisages a permanent moratorium on levying of customs duty on those digital products transmitted through electronic means.
Intellectual property cooperation
The Agreement on Intellectual Property Rights contemplates close collaboration and cooperation between the parties, including in the area of plant variety rights. The respective leading training centres, viz, the IP Academy, Singapore and IP Training Institute, Nagpur, have been identified as initial partners for cooperation.
Science and technology cooperation
The Agreement on Science and Technology allows the fostering of closer collaboration in research and development, and commercialisation of technologies between the scientific and research communities. The areas of cooperation contemplated include: marine biotechnology, agricultural biotechnology, space research, advanced materials, information technology etc. The cooperation would be by way of exchange of information and data, organising joint seminars, workshops and meetings, facilitating visits and exchange of scientists, technical personnel or other experts.
The Agreement on Education envisages developing and promoting mutually beneficial cooperation in the field of education. Specifically, the Agreement also facilitates collaborations between the universities in Singapore and the renowned Indian Institutes of Technology (‘IIT’) and/or Indian Institute of Science (‘IISc’). In addition, the degrees specified by the University Grants Commission of India and awarded by a university or an institution of national importance of India and similarly, degrees awarded by the universities in Singapore, shall be recognised for the purposes of qualifying the holder to be considered for admission to the universities of both countries, in addition to all other admission criteria which must be satisfied.
The Agreement on Media provides a platform for the regulatory agencies from both countries to work closely, focusing on regulatory issues of mutual concern as well as digital media and convergent services, intellectual property rights, education and training, co-production of content, distribution and marketing and research and development. The media covered is print, film and broadcasting.
Protocol amending the DTAA
Capital gains tax exemption
As per the newly introduced protocol to the Singapore-India DTAA, tax residents of Singapore will enjoy Indian capital gains tax exemption upon divestment of their investments in India, (akin to India’s much-spoken-of DTAA with Mauritius). However, there are certain exceptions: Indian capital gains tax exemption would not be available if the affairs of the Singapore Company are arranged primarily to take advantage of the benefits of the DTAA. In addition, a shell/conduit company with no real and continuous business activities in Singapore, and negligible or nil business operations, would not be allowed to enjoy this benefit. Interestingly, the aforementioned benefits are co-terminus with the India-Mauritius treaty, and will continue as long as such concessions are made available to Mauritius. A company will not be deemed to be a shell/conduit company if: it is listed on a recognised stock exchange of the country where the company is tax resident; or its total annual expenditure on operations in its resident state is equal to or more than S$200,000 (or Indian Rs 5,000,000) in the immediately preceding period of 24 months from the date the gains arise.
Reduction in withholding taxes
Withholding tax on royalties/fees for technical services has been reduced from 15 percent to ten percent. This is in line with the reduction in withholding tax rates under Indian domestic law.
The Road Ahead
India and Singapore have historically shared a long-standing friendship, as well as strong economic ties and close cultural links. Trade between India and Singapore has been steadily increasing in the recent past. India was Singapore’s 14th largest trading partner in 2004 and bilateral trade tripled within the past decade, from S$4 billion in 1995 to S$11.8 billion in 2004. During the course of negotiations for the CECA, bilateral trade with India increased by almost half, from S$7.8 billion in 2003, making India Singapore’s fastest growing trading partner among the major economies. In return, India’s exports to Singapore grew faster than exports to any of India’s other trading partners from 2004 to 2005.
The CECA between India and Singapore is without doubt a landmark agreement – it is Singapore’s first comprehensive bilateral economic agreement with a major developing country and the first with a country from South Asia – and the first to include taxation agreement aspects. For India, this is its first such CECA with any country.
For two countries that already have such excellent ties, it should only be a harbinger of better things to come!
Kelvin Chia Partnership