It is an undeniable fact that to outgrow in this international market it is very important for any business to offer their products/services at the most competitive prices. Any business has to strike a perfect balance -in keeping profit margins intact and at the same time offering products/services at the most competitive rates. Isn’t is like walking on the edge of a sword?

So one of the ways to offer products at competitive rates while keeping profits margins intact is lowering the cost of imported products. So how can it be done? – Answer is exploring Free Trade Agreements / Preferential Trade Agreements (FTA/PTAs) for import of products from outside India.

To avail optimum advantage of the same, let’s understand the “W”s of FTAs/PTAs.

# What are Free-Trade / Preferential Trade Agreements?

FTAFTA/PTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non-tariff barriers on substantial trade between them. FTAs, normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.)

# Which are the major FTAs/PTAs/CEPAs of India?

The major bilateral and regional agreements of India are: Acronym Groupings Member countries name FTAs/PTAs
1 APTA Asia Pacific Trade Agreement Bangladesh, China, India,Republic of Korea, Sri Lanka   PTA
2 Indian ASEAN TIG India ASEAN Trade in Goods Agreements Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam and India FTA
3 SAFTA South Asia Free Trade Agreement India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and Maldives FTA
4 ISLFTA Indo Sri Lanka FTA Sri Lanka  , India FTA
5 IMCECA Indo Malaysia CECA Malaysia, India FTA
6 ISCECA India Singapore CECA Singapore, India FTA
7 JICEPA Japan India CEPA Japan, India FTA
8 IKCEPA India Korea CEPA South Korea, India FTA

# Why are FTAs signed between countries?

Countries negotiate Free trade Agreements for a number of reasons:

  • Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade.
  • Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment over non-FTA member country competitors. For example in the case of ASEAN, ASEAN has an FTA with India but not with Canada. ASEAN’s custom duty on leather shoes is 20% but under the FTA with India it reduced duties to zero. Now assuming other costs being equal, an Indian exporter, because of this duty preference, will be more competitive than a Canadian exporter of shoes. Secondly, FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs.

Let’s understand the impact ofFTA on import of machinefalling under HS code – 847690, from South Korea by a simple example,

Particulars Normal Import prices Import price under FTA
Assessable value of import of machinery 1,00,00,000 1,00,00,000
Basic Customs Duty @ 7.5% 7,50,000 0
Social Welfare Surcharge @ 10% 75,000 0
IGST @ 18% 19,48,500 18,00,000
Total landed cost 1,27,73,500 1,18,00,000
Savings   9,73,500

# Recommendations for any importer

If you are importing any product from any country do not miss out on exploring the possibility to import zero or at concessional rate of customs duty under Free Trade / Preferential Trade Agreement.

# Recommendations for exporter

If you are exporting any product to any country do not miss out on exploring the possibility to export under Free Trade / Preferential Trade Agreement so that the importer in other country can import at zero or concessional rate of customs duty.

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November 2020