The agreement was signed by the Indian ambassador to China, Gautam Bambawale, and Hong Kong finance secretary Paul Chan Mo-po in Hong Kong.
“The DTAA agreement will stimulate a greater flow of investment, technology and personnel from India to Hong Kong, and vice versa," Bambawale said at a joint event organized by the Asia Society Hong Kong and the Indian Embassy.
India has more than 86 DTAAs in place with various countries that provide tax relief on transactions carried out between India and these countries.
The India-Hong Kong DTAA offers similar provisions as it will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India.
It will also provide clarity to international businesses operating in both countries regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This should allow investors to be more confident about their investment decisions.
Recent years have seen trade and investment relations between India and Hong Kong expand rapidly.
India was Hong Kong’s third largest export market (after China and the US) in 2017 and Hong Kong was India’s third largest export market (after the US and the UAE).
India-Hong Kong trade in 2017 was approximately $34 billion (a growth of 27% over the previous year) while exports from India to Hong Kong were close to $13.7 billion, an increase of 15.8%. India’s imports from Hong Kong also increased by 35.9% to $20.34 billion.
Hong Kong companies have also been increasingly looking at India as an investment destination and many of them have a huge presence in India, including China Light and Power (CLP), Li and Fung, Jardines, Shangri La, Kerry Logistics and Johnson Electric.
Hong Kong is similarly host to a large number of Indian companies and professionals in banking, IT and shipping.
Eleven public sector banks and three private sector banks from India are currently operating in Hong Kong. It is also a major sourcing centre for Indian companies. Hong Kong has emerged as a major re-exporter of items it imports from India to Mainland China.
“Hong Kong has a very well established Indian diaspora and has much wealth and business influence within the territory. With DTAA, businesses in both India and Hong Kong have finally been given better financial incentives to work together and increase trade and prosperity between them," said Bambawale, who has previously been the high commissioner of India to Pakistan and ambassador of India to Bhutan.
He was also the first consul general of India in Guangzhou and served in Hong Kong and Beijing between 1985 and 1991.
The double taxation avoidance agreement comes as a step in the right direction at a time when India-China relations have been severely tested with military tension escalations close to their disputed border in Doklam, increasing competition in their neighbourhood of South Asia, and with growing mistrust between Beijing and New Delhi.
But Bambawale remains optimistic and pragmatic.
“The damage 2017, and Doklam have inflicted on the relationship between the two Asian giants is by no means irreparable," he says. “Due to the sage leadership of both countries and hard work of our diplomats, the issue of Doklam has been de-escalated peacefully."
He explains that while a complete de-escalation may take months or even a decade, both countries plan to look past it to forge greater economic and cultural bilateral engagements. “Today, India-China trade has reached an all-time high of $84.5 billion. This is not counting the $34 billion, which India trades with Hong Kong. We are aiming for $100 billion dollars of trade in the near future," he said
Bambawale points to a key success story emblematic of this growth: “In the space of just a couple of years, the Chinese maker of budget mobile phones Xiaomi became the largest mobile handset provider in Indian market, overtaking Samsung. Today, India is seen as one of the most important overseas smartphone markets for Chinese brands, which face stiff competition and a saturated market at home. Chinese companies, including Xiaomi and Oppo, have even set up manufacturing plants in India. Chinese companies today account for more than 50% of the India mobile handset market."
In 2017, Chinese companies also invested roughly $311 million in India, and Indian companies invested close to $150 million in China, indicating an upward growth trajectory in the investment relationship between the two nations.
“The fact that Alibaba is a major part of Paytm in India is a very big deal, and we think that Indian companies would also be in a position in the near future to help out in some of the areas that the Chinese government has targeted, particularly artificial intelligence (AI) and Big Data," he said.
Citing another success story of China-India relations from a cultural standpoint, Bambawale said: “Indian Bollywood movie Dangal became the most popular non-Chinese films in China. This is unique. And we should build on this trend. China should import more Bollywood films so as to better understand India."
“India and China are partners in development and progress and not rivals," he says.
However, he concedes that both countries are “not interacting enough, trading enough, travelling enough."
He believes that this is where Hong Kong can play a critical role.
Pointing to the strong growth in relationship in recent years between India and the Association of Southeast Nations (Asean), which he attributes to the leadership role provided by Singapore, he says: “Hong Kong can play a similar role as Singapore of being a leading catalyst in deepening ties between India and China, because there is greater trust and understanding between India and Hong Kong today than between India and China."
“If Hong Kong is able to play this catalyst role, I think the Indian elephant and the Chinese dragon will dance together sooner, rather than later."
But he is realistic that there is a lot of catching up to do still.
Citing one such example, he notes that every week between Singapore and different cities of India, there are over 500 flights.
The corresponding figure for Hong Kong is just about a 100.
Bambawale is convinced though that this issue of connectivity will be addressed in the near future with deepening economic ties.
“The Double Taxation Avoidance Agreement will be a great step forward in integrating India better with Hong Kong, and India with China as a whole," he says.
Edited excerpts from an interview:
What critical challenges do India and China face today economically?
The foremost is India’s large and growing trade deficit with China. Last year, it was $51 billion, which accounts for half of India’s global trade deficit, of about $110 billion, with all the rest of the countries globally.
The increasing trade deficit with China can be attributed primarily to the fact that Chinese exports to India are predominantly in manufactured items to meet the demand of fast expanding sectors such as telecom and power, while India’s exports to China are characterized by primary and intermediate products. We are also talking with the Chinese government to work on another long-standing issue. India sells its pharmaceuticals and computer software or information technology-enabled services (ITeS) globally, but we don’t sell much at all in China. And the reason for this is the non-tariff barriers against these two industries in which India has a competitive advantage.
We are trying to work with the Chinese government to reduce these non-tariff barriers and then we hope that we will be able to reduce our trade deficit.
What is your view of India’s decision to boycott the Belt and Road Initiative (BRI) of China last year, which the US and Japan attended?
We don’t have a problem with the overall BRI, but one of its flagship projects, which is the China-Pakistan Economic Corridor.
We have a major problem on that because we believe that it violates our sovereignty and territorial integrity.
It runs through a part of land that we claim to be India’s, so we oppose it. So, unfortunately, that is an area of strategic disagreement. But, we need to cooperate more with each other to move forward and past it.
How can India and China better cooperate in the near future to ensure a de-escalation in geopolitical tensions?
Today, the energies of the people of India are focused inward on economic development, social progress and national transformation. In initiatives such as ‘Make in India’, ‘Skill India’, ‘Clean India’, ‘Digital India’, ‘Smart Cities’, we welcome China’s participation and help in furthering these national goals of India. I feel that for two large countries with big populations, big economies, we are not talking to each other enough, and we need to do that much more.
We need to do it at the leadership level of President Xi Jinping, Premier Li Keqiang, and Prime Minister Narendra Modi, but we also need to most importantly increase the exchanges at the people-to-people level.
In 2018, we should aim to have a greater exchange of military personnel, parliamentarians, business leaders, journalists, academics, students, sportspersons and filmmakers between the two nations.
Yet, another way is to increase tourism between the two nations in both directions.
What are the common positions of India and China today that can be leveraged to improve relations between the two nations?
Internationally, India and China are partners in the G20, in the WTO, in BRICS, in SCO, in which on many international issues we have very similar approaches, if not identical, positions and stands. The prime example of a common position is that of climate change. We have been working closely together on this in the past and under the new international circumstances arising from the West, it is especially important that we continue to work even closer together.
India and China have also benefited tremendously from globalization. It has provided a common platform for both our countries to benefit economically and grow on the world stage. We need to together ensure that the global rules of trade and security between nation-states should continue to be upheld and promoted.
Finally, India and China are threatened by international terrorism. We need to greatly expand our cooperation in counter-terrorism to make the world a safer place.