Purpose of the Bills

This Bills Digest relates to three Bills (collectively ‘the Bills’):

• the Customs Amendment (India-Australia Economic Cooperation and Trade Agreement Implementation) Bill 2022 (the Customs Bill)
• the Customs Tariff Amendment (India-Australia Economic Cooperation and Trade Agreement Implementation) Bill 2022 (the Tariff Bill) and
• the Treasury Laws Amendment (Australia-India Economic Cooperation and Trade Agreement Implementation) Bill 2022 (the Taxation Bill).  

The purpose of these Bills is to amend the Customs Act 1901, the Customs Tariff Act 1995 and the International Tax Agreements Act 1953 to implement Australia’s commitments under the Australia-India Economic Cooperation and Trade Agreement (ECTA) that require the passage of legislation by Parliament.[1]

The general position under Australian law is that treaties which Australia has joined or signed are not directly and automatically incorporated into Australian law. Signature and ratification do not, of themselves, make treaties operative domestically.

Following signature, treaties are tabled in both Houses of Parliament for consideration by the Joint Standing Committee on Treaties (JSCOT). Following receipt of JSCOT’s report, and prior to entry into force of the treaty, any legislative changes required to implement the treaty domestically must pass both Houses of Parliament.[2]

Structure of the Bills

The Customs Bill will amend the Customs Act to:

• implement the rules contained in the ECTA for determining the originating status of goods imported from India (Indian originating goods) for the purpose of determining which goods are eligible for preferential tariff treatment (Part 1, Schedule 1)
• allow the Regulations to prescribe documentation and record keeping requirements for exporters of Australian originating goods, and provide Australian Customs officials with the power to verify such goods (Part 2, Schedule 1) and
• clarify how the amendments contained in Part 1 will apply (Part 3, Schedule 1).  

Schedule 1 of the Tariff Bill will amend the Customs Tariff Act to specify the tariff rates that will apply to Indian originating goods under the ECTA.

Schedule 1 of the Taxation Bill will amend the International Tax Agreements Act to cease the taxation of income of non‑resident Indian firms providing technical services remotely to Australian customers.

Background

Overview of the Australian tariff system

All goods (above a set minimum value) imported into Australia, whether by air, sea or post, must be cleared through Australian Customs/Border Force.[3] The typical duties and taxes paid on imported goods include import processing charges, Goods and Services Tax (GST), and customs duties (also known as tariffs or import duties).

Customs duty is payable as a rate/percentage of the total value of the imported goods.[4] Customs duty rates typically range from 0% to 10%. Different goods are taxed at different customs duty rates (for example, 5%, 10%) according to the Australian tariff classification system.

Free trade agreements (FTAs) aim to reduce tariffs for goods traded between countries. In other words, goods imported from an FTA partner country may be eligible to receive preferential (lower) duty rates. Some economists argue that lower tariffs and fewer trade barriers promote economic growth.[5]

History of the negotiations of the ECTA

Launch of a Comprehensive Economic Cooperation Agreement

Australia and India first launched negotiations for a Comprehensive Economic Cooperation Agreement (CECA) in May 2011.[6] However, the negotiating positions of Australia and India were considered ‘too far apart to make the conclusion of a CECA a realistic objective in the near term’.[7]

According to the Department of Foreign Affairs and Trade (DFAT), ‘there were nine rounds of negotiations before both countries decided to suspend negotiations in 2016, pending the outcome of other multilateral regional negotiations’.[8]

India’s participation in RCEP negotiations

In November 2012, Australia, China, Japan, India, New Zealand, South Korea, and the 10 members of the Association of Southeast Asian Nations (ASEAN) launched negotiations for the Regional Comprehensive Economic Partnership (RCEP) Agreement.[9] In his report to the Australian Government setting out an India economic strategy to 2035, the former Secretary of DFAT, Peter Varghese, recommended that ‘Australia should prioritise trade negotiations with India in RCEP and return to bilateral trade negotiations once an RCEP deal is concluded’.[10] This recommendation was supported by the Morrison Government in its response to Mr Varghese’s report.[11]

Prior to the RCEP Agreement being concluded in November 2020, India announced that it would be leaving negotiations as the RCEP Agreement ‘does not address satisfactorily India’s outstanding issues and concerns’.[12] This outcome was previously foreshadowed by Mr Varghese, who noted that ‘India’s ability to make sufficiently credible market access commitments in RCEP is constrained by its sensitivities in goods, particularly agriculture, but also by its desire to lower its trade deficit with China’.[13]

Following India’s withdrawal, the remaining countries agreed to a Ministerial Declaration which set out the process for India to accede to the RCEP Agreement at a later date.[14] Australia has since ratified the RCEP Agreement.[15]

Negotiation of the Economic Cooperation and Trade Agreement

In August 2021, then Australian Trade, Tourism and Investment Minister Dan Tehan and his Indian counterpart, Commerce and Industry Minister Piyush Goyal, released a joint statement discussing the negotiation of an ‘early harvest announcement by December 2021 on an interim agreement to liberalise and deepen bilateral trade in goods and services, and pave the way for a comprehensive agreement’.[16]

This was followed by the formal launch of negotiations on 1 October 2021, where Australia and India reaffirmed their commitment to reach an interim agreement by December 2021 and ‘to conclude the negotiations of a full CECA by the end of 2022’.[17]

Commentators such as Justin Brown, a former Deputy Secretary at DFAT, noted that this change in trade policy by the Indian Government reflects ‘India’s own concerns with China’, as well as a ‘strong focus by India to identify new markets to support its post-pandemic recovery’.[18] However, the agriculture sector remains a key sensitivity for India and ‘the Modi government has been reluctant to put domestic farmers (a major voting bloc) at risk, especially with certain Indian state elections in late 2022 and in 2023 and the national elections following just over the horizon in 2024’.[19]

The ECTA was signed on 2 April 2022 and primarily focuses on commitments on goods and services, with commitments on investment, government procurement and digital trade falling outside of the scope of the ECTA.[20] A summary of Australia’s obligations under the ECTA is set out in the National Interest Analysis prepared by DFAT.[21]

DFAT has stated that it will pursue ‘further liberalisation for goods (such as dairy, grains, horticulture and certain non-ferrous metals) and services (such as education, professional services and environmental services)’ in negotiating a CECA with India.[22]

Committee consideration

Joint Standing Committee on Treaties

In line with Australia’s treaty making processes, the text of the ECTA was tabled in Parliament on 4 April 2022 and was subsequently referred to JSCOT for inquiry and report, but this inquiry lapsed following the dissolution of the House of Representatives on 11 April 2022.[23]

Following the commencement of the 47th Parliament, the ECTA was tabled in Parliament on 27 July 2022 and re-referred to JSCOT on 1 August 2022, with JSCOT to report to Parliament by 18 November 2022.[24]

Selection of Bills Committee

At its meeting on 26 October 2022, the Senate Selection of Bills Committee deferred consideration of the Bills until its next meeting.[25]

Senate Standing Committee for the Scrutiny of Bills

The Scrutiny of Bills Committee had no comments on the Treasury Bill and has yet to consider the Customs Bill or the Tariff Bill.[26]

Policy position of non-government parties/independents

Shadow Minister for Trade, Tourism and Investment, Kevin Hogan, has stated that the Coalition supports the passage of the Bill and ‘will do whatever is needed, including sitting extended hours, to ensure passage through both Houses of Parliament as quickly as possible’.[27]

Position of major interest groups

Stakeholders have been broadly supportive of the ratification of the ECTA, noting it will be a stepping-stone to a broader comprehensive agreement with India.[28] For example, the Group of Eight (a peak body representing Australia’s leading research-intensive universities) welcomed the ECTA for facilitating educational exchange opportunities with Indian students providing them with more post-study work rights in Australia.[29]

The Business Council of Australia (BCA) noted the ECTA is a ‘welcome and important step in the journey towards a greater trade and investment relationship’ with India.[30] The BCA submitted that that the Government must redouble its efforts to conclude a full CECA as soon as possible and listed a number of areas which would require further work, including investment protections, promoting greater labour mobility and greater agriculture access for Australian exporters.[31]

While India has agreed to reduce tariffs on products such as Australian wine and sheep meat, a number of key sectors of interest to Australia (for example, dairy, sugar and wheat) remain subject to high tariffs.[32]

Spirits and Cocktails Australia and the Australian Distillers’ Association expressed their disappointment that the ECTA did not remove ‘the very high tariffs faced by imported spirits’ into India.[33] Stakeholders also questioned the ‘lack of ambition’ with respect to products where tariffs were reduced, with Pernod Ricard Winemakers (which produces Australian wine brands Jacob's Creek, St Hugo, George Wyndham and Orlando) stating that the ECTA ‘represents a missed opportunity to open up a critical growth market at a really delicate time in our industry’.[34]

Queensland Canegrowers Association Ltd noted that ‘India has failed to make new commitments on sugar’ and raised concerns regarding ‘India’s reluctance to abide by its existing international (WTO) trade obligations with respect to sugar and its general reluctance to constructively engage in trade negotiations affecting agriculture’.[35]

The Australian Council of Trade Unions (ACTU) raised a number of concerns regarding the ECTA and called for the agreement to be re-negotiated.[36] In particular, the ACTU argued that the commitments made by Australia in the ECTA with respect to temporary workers are not consistent with the Government’s policy to preference permanent migration and do not protect migrant workers.[37]

Financial implications

The Explanatory Memoranda to the Customs and Tariff Bills state that the Government estimates that implementation of the ECTA will reduce customs duty collections by $335 million over the forward estimates.[38]

The Explanatory Memorandum to the Taxation Bill states that changes to the taxation arrangements proposed in the Bill ‘were estimated to have a cost to receipts of $145 million over the forward estimates at the time of the 2022 Pre-election Economic and Fiscal Outlook’.[39]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.

The Government considers that the Bills are compatible.[40]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights had not yet commented on the Bills.

Key issues and provisions

Customs Bill

The Customs Act provides for the broad administrative rules regarding the import and export of goods, including which Rules of Origin (ROO) apply to goods with respect to a specific FTA.

ROO determine which goods are eligible for preferential tariff treatment. ROO are negotiated between parties to a FTA and therefore may vary across different FTAs. Generally, they require a product to be entirely produced in one of the participating countries or have a minimum percentage of the value produced there in order to qualify for preferential tariff treatment.[41]

Product Specific Rules determine the circumstances in which goods imported from a party, that have components or inputs from a non-party, are still eligible for preferential tariff treatment.

In order for goods to receive preferential treatment under the FTA, an exporter will need to demonstrate that they comply with the ROO under the relevant FTA. While some FTAs allow exporters to self-declare the origin of their products, other FTAs empower Customs authorities to request businesses to show a Government-authorised Certificate of Origin in order for the business to receive a preferential tariff treatment.[42]

Part 1, Schedule 1 of the Customs Bill inserts proposed Division 1JA into Part VIII of the Customs Act to provide for which goods are Indian originating goods and are therefore entitled to receive preferential rates of duty (as set out in Chapter 4 of the ECTA).

Broadly speaking, to be classified as an Indian originating good, a good must be:

• wholly obtained or produced in India, or in India and Australia (proposed section 153ZMM) or
• produced in India, or India and Australia, with non-originating materials (or a combination or originating and non-originating materials) that meet the Product Specific Rules set out in Annex 4B to the ECTA or the requirements set out in proposed subsection 153ZMN(3)[43] and

the importer of the goods must have obtained a Certificate of Origin for the goods (except where Australia has waived this requirement).

Proposed section 153ZMP specifies how packaging materials and containers are to be treated when determining the origin of the goods, while proposed section 153ZMQ clarifies the circumstances when originating goods that are transferred through other countries before arriving in Australia (referred to as consignment) will not receive preferential treatment.

The provisions contained in Part 2, Schedule 1 of the Customs Bill:

• allow the Regulations to prescribe record keeping obligations which apply to the exporter/producer of goods claimed to be Australian originating goods (proposed section 126AMF) and
• provide Australian Customs officials with the power to require an exporter/producer to produce such records (proposed section 126AMG) and the power to ask the exporter/producer questions in order to verify the origin of the goods (proposed section 126AMH).

Tariff Bill

The Customs Tariff Act sets out the specific tariff/customs duty rates that apply to goods imported into Australia. The Tariff Bill amends the Customs Tariff Act to provide for the customs duty rates for Indian originating goods in accordance with the ECTA.

The Trade in Goods Chapter (Chapter 2) of the ECTA outlines Australia and India’s commitments to eliminate or reduce customs duties for a range of goods, as outlined in Schedules for each Party in Annex 2A (Tariff Commitments). Australia’s Schedule to Annex 2A provides for the customs duty rates to be applied to Indian originating goods.

Specifically, the Bill will:

• provide a ‘Free’ rate of customs duty for ‘Indian originating goods’ (other than goods listed in proposed Schedule 10A to the Customs Tariff Act, at item 24 of Schedule 1 to the Tariff Bill) with effect from entry into force of the ECTA
• insert proposed Schedule 10A to:
  • specify the phasing rates of customs duty for certain ‘Indian originating goods’ that will incrementally reduce to ‘Free’ by the 5th calendar year after ECTA enters into force for Australia; and
  • maintain rates of customs duty on certain alcohol, tobacco and petroleum products equivalent to the rates of excise duty payable on the same good when locally manufactured; and
• amend Schedule 4 of the Customs Tariff Act to maintain customs duty rates for certain ‘Indian originating goods’ in accordance with the applicable concessional item.[44]

Australia and India have also agreed that a ‘double-tariff cut’ will occur if ECTA enters into force prior to 1 January 2023.[45] A double tariff-cut is where an FTA has provided for an immediate tariff reduction to occur during the first year the agreement has entered into force, and then the staged tariff reduction occurs on 1 January of the following year, therefore enabling two tariff reductions to occur in a relatively short period of time. Proposed subsection 16(4AC) of the Customs Tariff Act, at item 9 of Schedule 1 to the Tariff Bill gives effect to this commitment.

Taxation Bill

Through an exchange of side letters to the ECTA,[46] Australia and India have agreed to resolve an issue concerning the application of taxation powers under the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the DTAA).

Presently, due to the interaction of the DTAA and Australian taxation legislation, the Australian Taxation Office (ATO) is required to tax the offshore income of Indian firms providing technical services into Australia, although Australia does not generally tax such services and such taxation is not imposed on these services from other countries.[47] The typical category of services currently impacted by these arrangements include engineering services, architectural services and computer software development.[48]

Item 3 of the Taxation Bill inserts proposed section 11J into the International Tax Agreements Act to clarify that payments or credits made to Indian residents by Australian customers for technical services provided remotely that are covered by Article 12(3)(g) of the DTAA are not subject to taxation in Australia.

Commencement details

Sections 1–3 of the Customs Bill, Tariff Bill and Taxation Bill commence on Royal Assent.

Schedule 1 of the Customs Bill and Schedule 1 of the Taxation Bill will commence on the later of the day of Royal Assent and the day the ECTA enters into force. However, the amendments will not commence at all if the ECTA does not enter into force.

Schedule 1 of the Tariff Bill will commence at the same time as Schedule 1 of the Customs Bill commences.

Concluding comments

Overall, stakeholders have been broadly supportive of the ratification of the ECTA, though some have questioned the quality of the outcomes for agricultural exporters, Australia’s commitments relating to temporary migrant workers and raised concerns regarding the challenges of negotiating a CECA with India. As noted by Professor Amita Batra, India’s only other attempt at an early harvest agreement (a limited “trade in goods” agreement with Thailand in 2003) ‘has not culminated into a full free trade agreement even after 19 years of the framework agreement having been announced’.[49]