EU, India Announce ‘Comprehensive Connectivity Partnership’
India’s middle class consumer base to reach 580 million by 2025.
All EU countries have double tax treaties with India, reducing profits taxes.
Many opportunities to sell and export to one of the world’s fastest growing markets.
India and the European Union announced a ‘Comprehensive Connectivity Partnership’ on Saturday (May 8, 2021) to support “resilient and sustainable connectivity projects” in India and other nations and regions such as Africa, Central Asia, and the Indo-Pacific where India is looking to boost regional trade and influence.
The development gains significance as it is India’s first such connectivity initiative with any foreign partner covering three geographical zones. The India-EU partnership covers digital, energy, transport, and people-to-people sectors, and is aimed at pooling together resources, standards, and expertise to service the next generation of sustainable, digital infrastructure.
The partnership has been designed to include participation of private sectors from both India and the EU. The Partnership document reads: “In order to facilitate large-scale private investments in sustainable connectivity, the two sides express their commitment to implementing relevant international standards, to ensure a level playing field for companies and to ensure reciprocal access to markets.”
The two sides have also decided that the implementation of the partnership will be aligned with that of the EU-India 2025 Roadmap.
How EU member states can benefit
Supporting penetration into the India market
The EU is India’s third largest trading partner, accounting for €62,8 billion worth of trade in goods in 2020 or 11.1 percent of total Indian trade, after China (12 percent) and the US (11.7 percent).
The EU is the second-largest destination for Indian exports (14 percent of the total) after the US.
India is the EU’s 10th largest trading partner, accounting for 1.8 percent of EU total trade in goods in 2020, well behind China (16.1 percent), the US (15.2 percent), and the UK (12.2 percent).
Trade in goods between the EU and India increased by 72 percent in the last decade.
Trade in services between the EU and India reached €32.7 billion in 2020.
The EU’s share in foreign investment inflows to India more than doubled from eight percent to 18 percent in the last decade.
EU foreign direct investment stocks in India amounted to €75.8 billion in 2019, which is significant but way below EU foreign investment stocks in China (€198.7 billion) or Brazil (€318.9 billion).
Some 6,000 European companies are present in India, providing 1.7 million direct jobs and indirectly employing 5 million people in a broad range of sectors.
Specific areas of note for EU exporters
Lifting of restrictions to enable agricultural producers across the EU to export EU produce to India for the first time.
Securing improved access for medical devices through the acceptance of EU Certificates of Free Sale in India and removing the requirement for additional accreditation of EU medical devices when exporting to the Indian market before they can be sold.
Committing to deepening co-operation in educational services and concluding work on the recognition of EU higher education qualifications, an outcome expected to encourage an increase in student flows, skills transfer, and knowledge sharing between the EU and India.
Committing to working on removing barriers in the Indian legal services sector. This is anticipated support in preventing EU lawyers from practicing international and foreign law in India, a step that could significantly increase EU legal services exports and EU legal services imports from India.
The Comprehensive Connectivity Partnership (CCP) creates immediate opportunities for EU businesses in India across industries, including food and drink, life sciences, and the services sector. Non-tariff barriers on fruit and medical devices will be lowered – allowing EU businesses to export more of their products to India.
An example of how the CCP is expected to work can be seen in the immediate deals that were signed. Opportunities exist in these areas, and others:
Researching, developing, and licensing new pharma products
Biotransformation technology, which enables plastics to become fully bio-degradable
Biopharmaceutical finished products
Robotics surgical equipment
Critical hardware and software bespoke data centers
Drone surveying equipment and AI technology
Smart meter test benches for electricity distribution companies
Video game production, and digital entertainment platforms
Color and additive solutions for the vinyl, non-vinyl and associated additive industries
There are issues, however ,with exporting to India. In many cases, and especially in consumables, rigid testing and approvals are required of products to ensure they are contamination free and adhere to Indian quality control (QC) standards. That requires the engagement of third-party agents in India to assist with the QC process. It is critical to note that at present, no free trade agreement between the EU and India exists, meaning there is no specific agreement on these protocols. It is also important to note that India as a country is a Union of States, and regulatory aspects differ from each to each – there is no one ‘India inclusive’ mechanism in place. For example, some Indian States are ‘dry’ – meaning no alcohol is permitted into these markets or supply and distribution is heavily regulated. That means wine and spirit exporters need to do their homework on where product can be imported and retailed.
EU exporters will need to source a reliable importer and distributor – as mentioned above, it will be necessary to plan out where and how to distribute your product in advance as different Indian States have different policies, and some impose tariffs on products brought in from another State. That means the entire ‘Selling to India’ strategy needs to be worked out in advance. India has a significant professional services industry, and tapping into local business matchmaking services will strengthen market access for exporters and ensure they arrive at a cost-competitive strategy.
The World Economic Forum has stated that within the coming decade, India will have one billion domestic consumers buying from the internet. A relatively inexpensive way to sell to India is through e-commerce channels.
Managing your exports yourself – Setting up an Indian liaison office
As volumes and revenues increase, it may become pertinent to establish your own office in India – with your own staff assisting with all the import and distribution regulatory aspects in-house. This cuts down on the cost of agents; it is wise to know when those overheads can be offset by going it alone. India provides foreign businesses with an opportunity to do just this, in the form of establishing a liaison office (LO). These operate as local cost centers but have the advantage of bringing everything under one roof.
Manufacturing and selling to India and overseas
Ultimately, your EU business operations in India may wish to take its newfound expertise and take advantage of the Free Trade Agreements India has with other countries. These permit products manufactured in India to be exported, at reduced, or duty-free tariff rates, to other markets, including Bangladesh, Nepal, Pakistan, Sri Lanka, the ASEAN markets of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, as well as to China. India also has a Free Trade Agreement with Mauritius – helpful for accessing the Africa market, some of the Gulf states and Mercosur in South America. Research on the applicability of these needs to be carried out, and a viable structure put in place, however the opportunity exists.
There are also options as to how to establish a manufacturing unit in India. A well-established, pan Indian partner can assist with much of the administrative issues and will also have contacts in place, forming a Joint Venture may be one route to go. Alternatively, EU investors may establish a wholly owned subsidiary company in India, conducting both manufacturing and trading.
Special economic zones and investment incentives
India has a wide range of special economic zones (SEZ) in place throughout the country; these are useful for conducting export manufacturing in India, such as importing EU components, matching these with Indian sourced components to produce a finished item, then either reselling to the India market (at which point import duties and goods and services tax/GST kick in) or exporting them elsewhere – including back to the EU.
Double tax treaties
India has one of the largest networks of tax treaties for the avoidance of double taxation and prevention of tax evasion. The country has Double Tax Avoidance Agreements (DTAAs) with over 85 countries under Section 90 of the Income Tax Act, 1961. All members of the European Union have DTAs with India.
The purpose of such tax treaties is to develop a fair and equitable taxation system for the allocation of the right to tax different types of income between the ‘source’ and ‘residence’ countries.
A double tax treaty mitigates double imposition of tax when there is a cross national flow of income and ensures tax neutrality. The agreement between the negotiating countries provides specific guidelines on how the income generated in one country and transferred to another is to be taxed by the source and resident country. This ensures protection to taxpayers against double taxation and prevent any deterrence that the double taxation may otherwise promote in the free flow of international trade, investment, and transfer of technology between two countries.
Reducing the India trade tax burden
DTAs can also be used to lessen the tax burden when trading with India. EU or non-India companies operating in India but conducting business in the country without a permanent establishment in the country (such as an architectural practice working on an Indian project) are subject to withholding tax on their income – dividend, interest, royalty, or fees for technical services, as prescribed under the IT Act.
However, foreign companies that are resident in the countries that India has a DTA with, can claim more beneficial provisions and rates between the IT Act and the DTA. This can save a significant amount of taxable income; however, it requires professional advice in India regarding how to structure the costs, expenses, and earnings before invoices are drawn up.
There are plenty of opportunities for EU businesses to access India and take advantage of new openings facilitated by the EU-India Comprehensive Connectivity Partnership. India’s middle class consumer population is significant and estimated to be the same size as that of the United States. Also, as India’s demographics are much younger compared to the US, India’s middle class is expected to become the largest in the world (in terms of numbers of people) by 2025.
EU businesses investing in India today are also likely to benefit later, as a EU-India Free Trade Agreement has been mooted to be in place by 2030 – further increasing the opportunities for trade. While that may seem some way off, the old adage of ‘the early bird’ applies and especially in a country such as India. Getting involved in the India market, learning how it works and where the niches are for your products and services is a process that should be started with as soon as is practical.
Source: Indida Briefing