What Happened
- The White House released a fact sheet detailing the India-US interim trade framework, emphasising that rules of origin will ensure benefits accrue predominantly to US and Indian products
- The US will reduce the cumulative tariff on Indian imports from 50% (25% reciprocal + 25% linked to Russian oil purchases) to 18%, after India committed to halt Russian oil purchases
- India will eliminate or reduce tariffs on all US industrial goods and a wide range of agricultural products including distillers' grains, tree nuts, soybean oil, fruits, wine and spirits
- India committed to purchasing over $500 billion of US products (energy, ICT, agricultural, coal) over the next 5 years
- India agreed to remove digital services taxes and address non-tariff barriers affecting US medical devices and ICT goods
Static Topic Bridges
Rules of Origin in Trade Agreements
Rules of Origin are criteria used to determine the national source of a product in international trade. They are critical in preferential trade agreements because they prevent "trade deflection" — where goods from non-member countries are routed through a member country to take advantage of lower tariffs. Rules of origin typically specify minimum value addition or substantial transformation that must occur within the partner country. Common criteria include: Change in Tariff Classification (CTC), Regional Value Content (RVC) thresholds, and product-specific rules. In the WTO framework, the Agreement on Rules of Origin (1994) seeks to harmonise non-preferential rules of origin.
- Two types: Preferential (under FTAs/PTAs) and Non-preferential (for MFN treatment, anti-dumping, trade statistics)
- India's general rule for FTAs: typically 35-40% domestic value addition
- Under India-ASEAN FTA, rules of origin require minimum 35% regional value content
- India-UAE CEPA (2022): uses product-specific rules combining CTC and RVC criteria
- "Certificate of Origin" is the document that certifies a product meets the origin criteria
Connection to this news: The emphasis on strict rules of origin in the India-US framework is designed to prevent third countries (particularly China) from trans-shipping goods through India or the US to capture preferential tariff benefits, making this a trade security measure as much as a commercial one.
Reciprocal Tariffs and US Trade Policy Under Section 301/232
The US trade policy framework includes several unilateral tariff mechanisms. Section 301 of the Trade Act of 1974 allows the US Trade Representative to investigate and respond to unfair trade practices by foreign countries. Section 232 of the Trade Expansion Act of 1962 permits tariffs on national security grounds. The current reciprocal tariff regime represents a broader application of tariff authority, where the US imposes tariffs calculated to match the effective tariff burden that trading partners impose on US goods. This approach departs from the WTO's Most Favoured Nation (MFN) principle, which requires equal tariff treatment for all WTO members.
- WTO's MFN principle (GATT Article I): any tariff advantage given to one member must be extended to all members
- Exceptions to MFN: Free Trade Agreements (GATT Article XXIV), Generalised System of Preferences, national security exceptions (GATT Article XXI)
- India's trade-weighted average tariff: approximately 10-12% (among the higher rates for major economies)
- US average applied tariff pre-2025 tariff escalation: approximately 3-4%
- The India-US deal uses an interim agreement structure rather than a comprehensive FTA, allowing faster implementation
Connection to this news: The reduction from 50% to 18% reciprocal tariff represents a significant de-escalation, but the 18% rate remains substantially higher than pre-escalation levels, reflecting the new baseline of US trade policy that conditions market access on broader strategic alignment including energy purchases and digital trade concessions.
Digital Services Tax and International Digital Trade Rules
India introduced an Equalisation Levy (commonly called a "Google Tax" or Digital Services Tax) in 2016 at 6% on online advertising services, expanded in 2020 to 2% on e-commerce supply of goods and services by non-resident operators. The levy was designed to tax digital companies that earn significant revenue from Indian users without having a physical presence in India. This has been a major point of US-India trade friction, with the US considering it discriminatory against American tech companies. The OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) proposed a two-pillar solution: Pillar One (reallocation of taxing rights) and Pillar Two (global minimum tax of 15%).
- India's Equalisation Levy: 6% on online advertising (2016); 2% on e-commerce supply (2020, expanded)
- OECD Pillar One: reallocates taxing rights to market jurisdictions for large MNEs with revenue >20 billion euros and profitability >10%
- OECD Pillar Two: global minimum corporate tax rate of 15% (agreed October 2021, implementation ongoing)
- US position: bilateral removal of DSTs in exchange for Pillar One implementation
- India also agreed to negotiate rules prohibiting customs duties on electronic transmissions — a contentious WTO issue where India had previously opposed making the e-commerce moratorium permanent
Connection to this news: India's agreement to remove digital services taxes as part of the trade framework represents a significant concession, potentially impacting revenue from major US tech platforms operating in India. This aligns India with the US bilateral approach rather than the multilateral OECD framework.
Key Facts & Data
- US reciprocal tariff on India: reduced from 50% (cumulative) to 18%
- India's commitment: $500 billion in US product purchases over 5 years
- India-US bilateral trade (FY25): $132.2 billion; India's trade surplus: $40.82 billion
- India's Equalisation Levy: 6% (online advertising, 2016) and 2% (e-commerce, 2020)
- WTO MFN principle: GATT Article I; FTA exception: GATT Article XXIV
- India's trade-weighted average tariff: ~10-12%
- India committed to address non-tariff barriers on US medical devices and ICT goods
- Framework includes supply chain resilience cooperation, investment screening, and export control coordination