Accounting and Auditing Services and India’s Free Trade Agreements (FTAs): Opportunities and Challenges

Introduction

The accounting and auditing services are amongst the most important professional services sectors worldwide. With diminishing international borders and increasing globalisation, the role of such services is becoming all the more important. The increasing inward foreign direct investment by multinational corporations in India and the outward investment by Indian enterprises are enabling a lot of demand for such services not only within India but also in other geographies. As a consequence, the accounting and auditing services are no more confined to serving only domestic markets. Serving international markets and having an outward orientation is increasingly becoming important for these services. This could be observed through the exports of accounting and auditing services from India that have consistently increased over the years. Considering their significant trade potential, these services are also becoming important in India’s recent FTAs.

This article assesses the trends in India’s exports and imports in the accounting and auditing services. It analyses accounting and auditing services in the context of the World Trade Organisation and also compares India’s commitments under the WTO and India’s FTAs, including the recently signed EFTA agreement. It also analyses the commitments made by EFTA and other countries for these services in India’s FTAs to understand the opportunities and challenges for the Indian accounting and auditing professionals.

India’s Trade in Accounting and Auditing Services

India’s exports of the accounting and auditing services have increased significantly from USD 958 million in 2018-19 to USD 2454 million in 2022-23, thereby reflecting around 250 per cent growth over these five years. On the contrary, India’s imports of these services have come down from USD 232 million in 2018-19 to USD 123 million in 2022-23. Another important observation is that India has a trade surplus in these services which has increased over the years (Table 1 and Figure 1). It implies that India’s exports are significantly higher than the imports for these services, thus contributing to a trade surplus in India’s overall services trade account, which in turn helps in mitigating the current account deficit.

Source: RBI data, various years

Accounting and Auditing Services under the WTO

The General Agreement on Trade in Services (GATS) of the WTO covers international trade in services. According to the Services Sectoral Classification List of the WTO GATS (MTN.GNS.W/120), the accounting and auditing services fall under ‘professional services’ which is a sub-sector of the ‘business services’ sector. These are termed as ‘Accounting, auditing and book keeping services’ with the Central Product Classification (CPC) code 862, which is based on the United Nations Provisional Central Product Classification of 1991.

India did not undertake any liberalisation commitments for accounting, auditing and book keeping services under the GATS in 1995. However, a new round of WTO negotiations, like the Doha Development Round, started in 2001. A number of WTO Members, including India, signalled their improved commitments by submitting their initial offers and revised offers at the WTO in 2004 and 2005 respectively. In its revised offer submitted during the Doha round, India offered its full commitments in the accounting and bookkeeping services for modes 1 and 2 but did not offer any commitments in mode 3. It also left its mode 4 commitment unbound, subject to horizontal commitments. It is also to be noted that India did not offer any commitments in the auditing services in its revised offer. Table 2 presents a snapshot of India’s revised offer for the accounting and bookkeeping services.

Source: Author’s compilation from India’s Revised Offer for Services in the WTO (2005)

Note on Terms:

• Limitations on Market Access: Conditions for entry of foreign service suppliers.
• Limitations on National Treatment: Conditions which discriminate between domestic and foreign service suppliers.
• None: No limitations, i.e., full liberalisation commitments.
• Unbound: No commitments for opening-up of the sector to foreign service suppliers.

Though India’s revised offer in this sector had some improvement as compared to its GATS commitments, it also reflected the sensitivities pertaining to the liberalization in this sector in general and in the auditing segment, in particular. The overall position taken by India in accountancy services in the revised offer could be considered as defensive. This defensive position was based on the suggestions from the ‘Working Group for Suggesting Negotiating Strategy in the Accountancy Sector’ that was constituted in 2002 by the government to advise it on its negotiating strategy for this sector (Pal, 2006).

It is worth noting that the Doha Development Round is not yet concluded and hence these revised offers are only indicative and are not legally binding commitments under the WTO. Therefore, it could be said that India still does not have any commitments for accounting and auditing services in the WTO.

Accounting and Auditing Services in India’s Free Trade Agreements

Till date, India has signed nine free trade agreements in services. Out of these seven are with individual countries, namely Singapore (2005), Korea (2010), Malaysia (2011), Japan (2011), Mauritius (2021), UAE (2022), and Australia (2022), and two with regional blocs of countries, namely, ASEAN (2015) and EFTA (2024).

i. India’s FTA Commitments in Accounting and Auditing Services

Unlike GATS, India had made some commitments in this sector in its FTAs. An analysis of India’s commitments for accounting and bookkeeping services in its existing FTAs including the most recently signed India-EFTA agreement reveals that the partial commitments in FTAs are largely based on India’s revised offer submitted at the WTO. As such, India made commitments only for accounting and bookkeeping services and excluded auditing services from any commitments in these FTAs. Mode 1 and 2 are kept as completely open and mode 3 as completely closed for accounting and bookkeeping services, as was there in its revised offer in the WTO.

A few changes have been observed in mode 4 limitations in various FTAs. For instance, in India-Singapore CECA, the first ever services FTA of India, India inscribed mode 4 market access and national treatment limitation requiring “fulfilment of criterion of registration with relevant Accountancy body in India and obtaining of professional indemnity insurance from home country for a period of stay of up to 12 months”.

However, in its subsequent FTAs with Korea, Malaysia and Japan, India did not inscribe these limitations for market access. For national treatment also, the limitation was curtailed to requiring only professional indemnity insurance from home country. These changes were made probably to reflect India’s revised offers at the WTO, which was submitted after the India-Singapore CECA.

The registration requirement was once again introduced as a national treatment limitation in the India-ASEAN FTA with some changes. First, the registration requirement is applicable for all the three committed modes, i.e. mode 1, 2 and 3 in this FTA. Second, the registration requirement was mentioned in respect of both Chartered Accountant and Cost & Works Accountant. These changes might have been introduced considering the fact that both Chartered Accountant and Cost & Works Accountant may be involved in accounting and bookkeeping services and some registration requirements may de facto discriminate between foreign and domestic service providers. Inscribing these as national treatment limitations would ensure that any discriminatory registration requirements imposed later on will not violate India’s commitments.

In the subsequent three FTAs with Mauritius, UAE and Australia, which were signed in the past three years and the most recent India-EFTA agreement, the element of ‘scheme of reciprocity’ was also introduced in this national treatment limitation pertaining to registration requirements. This was based on the requirements of the Chartered Accountants Act, 1949 (As amended by The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Act, 2022).

ii. India’s FTA Partners Commitments in Accounting and Auditing Services

In the recently signed India-EFTA agreement, the four EFTA countries, Switzerland, Norway, Iceland and Liechtenstein, have undertaken significant liberalisation commitments for accounting and auditing services. Switzerland has committed full market access in accounting, bookkeeping and financial auditing services (excluding auditing of banks), though it has inscribed some discriminatory limitations on mode 1 and mode 4 of financial auditing services to be provided by the Indian professionals. Iceland has completely opened up these services for the Indian accounting and auditing professionals. Norway has opened accounting and bookkeeping services significantly but kept some limitations on auditing services. Liechtenstein has also fully opened up its market for bookkeeping services (except tax returns), and accounting and auditing services except some market access limitations for mode 3 of the accounting and auditing services. Thus, it could be inferred that the newly signed India-EFTA agreement would create opportunities for accounting and auditing professionals of India to tap EFTA markets.

The India-EFTA agreement will also create opportunities for accounting and auditing professionals in the domestic market. As part of this agreement, EFTA countries agreed to increase their investment in India to USD 100 billion in the next 15 years and facilitate the generation of one million direct employment in India through such investments. This increased investment will lead to more business operations and hence an increased demand for accounting and auditing professionals within India.

We further analysed the commitments undertaken by FTA partner countries for accounting and auditing services in India’s other existing FTAs. It could be observed from this analysis that most of India’s other FTA partners have also made extensive commitments for these services. They have also opened up auditing services for auditing professionals from India, though India has not taken any commitments for auditing services in these FTAs. Therefore, significant opportunities also exist for the Indian Chartered Accountants to provide their services in the territory of these FTA partner countries and contribute to India’s services exports.

Opportunities also exist for the outsourcing services in the area of accounting and auditing services for the Indian Chartered Accountants and accounting professionals as mode 1 commitments in these FTAs are mostly ‘none’ by these countries in this sector. This is particularly important in the post Covid world wherein a significant part of the work is done in online mode.

iii. Mutual Recognition of Qualifications and FTA Provisions

An important challenge for the Indian accounting and auditing professionals while tapping the markets of FTA partner countries would be the recognition of their qualification in these countries. The opportunities created by these FTAs may be constrained by the lack of mutual recognition of qualifications for these services between India and its FTA partner countries. These FTAs provide a solution to this challenge by having provisions on mutual recognition of qualifications. For instance, the India-EFTA agreement has a provision that India and the EFTA countries shall engage with their relevant bodies or authorities and encourage them to establish dialogues with the relevant bodies or authorities of another country agreements or arrangements providing for the mutual recognition of the qualifications, licensing, and registration procedures.

Conclusion

Accounting and auditing services will be the backbone of India’s USD 5 trillion economy in coming years. As economic activities expand in the future, there will be an increasing domestic demand for such services. While the domestic market will continue to grow, significant opportunities also exist in overseas markets where the Indian accounting and auditing professionals can render their services and contribute to the Government of India’s ambitious target of USD 1 trillion services exports by 2030. The free trade agreements signed by India add to these opportunities as they provide binding market access commitments in the FTA partner countries. The Institute of Chartered Accountants of India already have mutual recognition agreements (MRAs) with some of these countries. The FTA provisions on MRAs will further enhance the export opportunities for the accounting and auditing services professionals of India.