A Bilateral Free Trade Agreement was signed between the Prime Ministers of India and Sri Lanka in New Delhi on 28th December, 1998 and has been in operation since March 2000. This was the first FTA India had signed by then.
The Agreement seeks to establish a Free Trade Area (FTA) through elimination of tariffs in a phased manner as under:
India would reduce tariffs to zero on 1350 tariff lines immediately on implementation of the Agreement. For the rest, except 429 items included in the Negative List, across the board duty free access would be given over a period of 3 years from the date of implementation of the Agreement. There is a tariff rate quota on tea for 15 million kgs. and on garments for 8 million pieces. From 18th March 2003, India's commitment of duty reduction has been competed. The items in the Negative List of 429 tariff lines at 6 digit level of Harmonised Code are from various sectors like rubber and rubber products, paper and paper boards, plastics and products thereof, coconuts, alcoholic beverages and textile items, etc.
Sri Lanka would give 100% duty concessions on 319 tariff lines on the date of operationalisation of the Agreement. In addition, it has given 50% tariff concessions on 839 tariff lines on the date of operationalisation of the Agreement which has been deepened to 100% as on today. For the remaining items, Sri Lanka would reduce tariffs to zero percent over a period of 8 years in three phases i.e. by 35% & 70% & 100% before the expiry of 3rd , 6th and 8th year respectively. In other words, India's exports on these items get 35% duty concessions from Sri Lanka as on today. Sri Lanka's Negative List comprises of 1180 tariff lines.
The preferential trade under the FTA is governed by the Rules of Origin which specify three criteria namely: (i) the domestic value addition should be 35%,
(ii) inputs to undergo substantial transformation at 4 digit level of customs harmonized code and
(iii) a list of operations like simple packing, cutting and assembly etc. have been defined which would not qualify for duty free market access. If the raw material/inputs are sourced from one country by the other, the value addition is reduced to 25% within the overall limit of 35%.
The lists for exchange of tariff concessions and procedures were finalised through Letters of Exchange between Commerce Secretary, Government of India and Treasury Secretary, Government of Sri Lanka on 2nd February, 2000. Subsequently, the Agreement was implemented after issuance of Customs Notification by Sri Lanka on 15th February, 2000 and by India on 1st March, 2000 and related notifications issued in May, 2000. The Tariff Rate Quota Mechanisms for import of Tea and Garments were finalised in April 2000 in New Delhi.
When the Prime Ministers of India and Sri Lanka met in New Delhi in June 2002, they took cognizance of the significant expansion of trade made possible by the ISLFTA. However, they also noted that there was much scope for expanding the areas of coverage of economic cooperation. Accordingly, a Joint Study Group (JSG) was set up to explore ways and means of deepening and widening economic cooperation through a Comprehensive Economic Partnership Agreement (CEPA). Dr. Rakesh Mohan, Dy. Governor of RBI was the Co-Chair of the JSG. The JSG completed its study and had submitted its report to two Prime Ministers in October 2003 in New Delhi.
The summary of recommendations of the JSG was to :
Enter into a Comprehensive Economic Partnership Agreement
Build upon the ISLFTA by deepening and widening the coverage of trade in goods.
Enter into broad negotiations covering all service sectors and modes of supply under the GATS framework.
Facilitate greater investment flows by addressing identified regulatory and operational constraints.
Implement measures to enhance economic cooperation to complement trade and investment liberalisation.
Complete negotiations on the CEPA within 4-6 months.
Establish institutional mechanisms to monitor the progress of the CEPA so that the objectives are realized.
Facilitate interaction between, and participation of, the private sectors of the two countries in the negotiations of the CEPA and its implementation.
Facilitate interaction between, and participation of, the private sectors of the two countries in the negotiations of the CEPA and its implementation.
The first meeting on CEPA at the Commerce Secretary level was held on 18th August, 2004 in Colombo. In this meeting, both sides highlighted the importance of deepening and broadening the scope of ISLFTA to CEPA. It was primarily an exploratory discussion broadly covering the scope of CEPA as well as use of JSG Report as a reference document for possible approaches and negotiations. This Ministry is having inter-ministerial consultations for proceeding further in this regard.
