- INTRODUCTION
The WTO, an organisation established as a successor of GATT (1994) with an aspirational fervour, to render the global trade barriers more permeable finds itself at an unprecedented low owing to the slow-strangling of its appellate body by the US. In the tussle between the WTO and the US, Least Developed Countries (LDCs) and the Global South find themselves entangled owing to globalisation, due to which an increased interdependence between countries has become inevitable. This interdependence however, seems to have created a balance of convenience on the side of the Global North. The influx between the Global North and Global South is undermined by variables such as tax competition, tax distortions and lowering of tariff barriers. This influx sees the Global North as its primary beneficiary, which has time and again become evident in the WTO regimes and developments. The most noticeable impact of such regimes is discernible through an investigation into the erosion of tax sovereignty of the countries falling within the Global South, who are objectively not able to turn away from such regimes due to consequences which may follow with their non-compliance, enabling consensual coercion of these nations to act in compliance with regimes favouring the Global North.
- UNVEILING THE PROCESSES OF THE WORLD TRADE ORGANIZATION
The mechanics of decision-making at the WTO have been known to be steered by Green Room Agreements. These agreements are arrived at through a system of “consensus” at meetings guided by the Quad (US, Japan, EU and Canada) which are known to have a quasi-official character and have been characterised by a lack of transparency and exclusivity, alienating developing countries from presenting their concerns or making substantial contributions to the deliberations. The negotiations made by dominating members are submitted to ‘inform’ the rest of the members. The Director General determines the list of invitees to the green room meetings, in which the US and EU have adopted an unwritten permanent position. It is noteworthy that the term “consensus” has not been given a definite meaning within the framework of the WTO but has been construed to mean an “absence of dissent” or a passive consensus.
The bargaining power at the meetings is anchored to factors such as wealth and population of a country, given that the US and EU lead the global trade, this position places the North at a vantage point while the South at the periphery of the decision-making regime. This hegemonic decision making becomes evident in the distribution of benefits emanating from the outcomes of such decisions. By administering such a strong foothold in the greenroom, the developed countries tend to leave the decision for other members as a ‘take it or leave it’ deal.
- CHALLENGES TO TAX SOVEREIGNTY
A prominent example of the scale of disadvantages being unbalanced in the favour of the Global South, is the Agreement on Agriculture (AoA) of 1995. The Agreement was an outcome of the altercation between the North and the South as a result of the position of agricultural protectionism held by the North which threatened to plunge the domestic markets of the South into a crisis.
The Agreement categorised domestic subsidies into “boxes” on the basis of their potential to distort trade and were accordingly made subject to tariff reductions. However, a system which may seem ostensibly equitable, was adversarial for the South as the reductions were averaged out, which had the potential to throw a veil over the fact that products with already high tariff peaks, were reduced minimally. Such loopholes led to a crisis of cheap imports competing against domestic products which posed a challenge to smaller economies. Resultantly, in 2001, the prices received by OECD farmers were 30% higher than the prices received elsewhere.
As a remedial initiative, developing countries were allowed to identify “special products” important for the said objective; these were to be exempted from tariff cuts. Further, to protect their interests, Special Safeguard Mechanism (SSM) was framed, which was mainly aimed at countering excessive imports. However, these negotiations posed a stalemate at the Doha Round (2001).
Prior to the Cancun Ministerial of 2003, EU and US devised a “Blended Formula” in 2003 for tariff cuts which mostly sidelined the concerns of developing countries. To counter EU and US, developing countries formed a coalition known as the G20 group on Agriculture. The coalition was led by India along with Brazil and China, which proposed special and differential treatment for developing countries and further subsidy cuts in the North. Given the sharply divided interests, the Cancun Ministerial proved to be unsuccessful, and the blame was thrown on G20. In the subsequent negotiations on AoA, the South continued to witness its interests being sidelined, as in 2005 at the Hong Kong Ministerial, the EU centred its proposal around Non-Agricultural Market Access (NAMA).
The imbalance in bargaining power is evident in outcomes such as the Agreement on Agriculture, where the North’s interests prevail, leaving the South with unfavourable terms. Despite attempts to counterbalance these disparities, such as the formation of the G20 coalition, the South continues to face challenges in securing fair trade policies. Ultimately, this hegemonic approach to WTO decision-making exacerbates global inequities, undermining the potential for more equitable international trade agreements. The Agreement on Agriculture (AoA) under the WTO undermines tax sovereignty by imposing restrictions on domestic subsidies and support measures that governments can offer to their agricultural sectors. For developing countries, the AoA caps on subsidies including export incentives and domestic support classified under “Amber Box” measures, limit their ability to provide tax-based relief or fiscal benefits to farmers. These constraints hinder governments from using tax policies effectively to promote agricultural growth, ensure food security, or protect rural livelihoods, often compelling compliance with rules that prioritize global trade norms over national policy needs.
Another recent regime causing an erosion of India’s tax sovereignty is the requirement to comply with the Global Minimum Corporate Tax (GMCT) proposed by the OECD in 2021. According to the deal, Multinational Enterprises (MNEs) would be subject to a minimum 15% tax and an additional top up tax on excess profits. For developing countries and LDCs, this could prove to be detrimental as it would drive away FDIs given that MNCs would be required to pay at least 15% tax globally even if a lower rate is offered by a host country. This would further would lead to a redistribution of revenues for smaller economies, as under the GMCT rules, the country of origin of the MNC could reclaim tax revenue generated when profits are shifted to low-tax jurisdictions. Thus, GMCT would restrict the autonomy of smaller economies to design tax policies tailored to meet their development goals.
Further, not long ago, India faced challenges to its Merchandise Exports from India Scheme (MEIS), which gave additional incentives on export of goods apart from other tax benefits conferred on exporters of such goods. As a result of a complaint against India by the US at the WTO, claiming that MEIS promoted export-contingent subsidies which are prohibited by the WTO. Thus, India had to discontinue the scheme, and was subsequently replaced with RoDTEP (Remission of Duties and Taxes on Exported Products) in 2021. RoDTEP provides refunds for duties/ taxes/ levies, at the Central, State & local level, borne on the exported product, including prior stage cumulative indirect taxes on goods & services used in production of the exported product and such indirect Duties/ taxes/ levies in respect of distribution of exported products. It is noteworthy that the refunds enjoyed by exporters under RoDTEP would be much lower than were provided under MEIS since RoDTEP is an input tax based scheme in contrast to MEIS, which was product based. The difference in refunds would be prominently noticeably especially for those sectors where the incidence of input taxes is low.
The challenges posed by global initiatives like the GMCT and international trade rules at the WTO underscore the delicate balance between aligning with global standards and preserving national tax sovereignty. For developing economies like India, these measures not only constrain policy autonomy but also impact revenue generation and competitiveness. The transition from schemes like MEIS to RoDTEP further highlights the limitations imposed by international regulations, where attempts to comply with global norms can lead to reduced support for critical export sectors. Therefore, it is imperative for smaller economies to advocate for more equitable frameworks that consider their developmental priorities and economic realities.
CONCLUSION
From the preceding discussion, an inevitable conclusion that follows is that a regime of consensual coercion governs the mechanisms at WTO. The state derives its legitimacy as an institution from people’s agreement to have their freedom restrained to a certain extent, in a quid pro quo setting where, in exchange of such restraint, protection of rights is guaranteed to the people. By virtue of the obligation of the sovereign to protect the rights of its citizens, the state is automatically granted sovereignty in taxation in order to satisfy public needs, but the advent of globalisation has fundamentally transformed the concept of tax sovereignty.
Thus far, India has adopted a defensive stance at the WTO by leading coalitions pertinent to SDT (Special and Differential Treatment) for developing countries, however, for it to prevent a compromise on its interests, it must give precedence to forming coalitions with potential of growth rather than those that may threaten its goodwill. In order for India to protect its interests, it must advance in its position as an individual leader by engaging in multilateral agreements to shape the global taxation framework, and prioritise reforms in the domestic policies to reduce the need for pressing for defensive trade measures at the WTO which would pose a risk of putting it at a predicament with other global powers.