The last 24 hours have been frustrating and, frankly, a little weird.
‘Frustrating’ because the benefits of the new UK-India trade deal – a clear Brexit win – are still being overshadowed by the row over social security contributions. ‘Weird’ because I have found myself siding with a Labour government against many people who I would normally regard as allies! But let’s move quickly on to the substance…
The UK and India have concluded talks on a comprehensive free trade agreement (FTA) which will come into force once the necessary ratification processes have been concluded.
The FTA includes reductions in India’s tariffs on a wide range of UK exports, notably cars, electrical machinery, medical devices, cosmetics, whiskies, and lamb. The UK will eliminate tariffs on 99% of Indian goods, including frozen shrimp, clothing, and textiles.
The FTA will also lower many non-tariff barriers, notably in public sector procurement. India will make make new commitments on copyright protection and on the environment as well.
In summary, this is exactly the sort of trade deal you would expect to command widespread support.
Unfortunately, almost all the attention has focused on the reciprocal Double Contributions Convention (DCC) which forms part of the deal.
This will ensure that “employees moving between the UK and India, and their employers, will only be liable to pay social security contributions in one country at a time. The DCC will also ensure that employees temporarily working in the other country for up to three years will continue paying social security contributions in their home country, preventing the fragmentation of their social security record.”
In effect, this means that some Indian workers and their employers will no longer have to pay UK National Insurance (NI) contributions for up to three years. This has led many to claim that Indian workers will now be able to ‘undercut’ British workers, opening the gates to another flood of cheap migrant labour. But in my view, this misses at least two key points.
First, the NI exemption will mainly apply to Indian professionals employed by Indian companies who are working in the UK for a limited period. It does not mean that UK companies have a free hand to swap British workers for Indian ones.
Second, the Indian worker and their employer will still have to pay Indian social security contributions. These rates are similar to UK NI (see this briefing from PWC), so the tax treatment of Indian and UK workers will be much the same.
In other words, rather than introducing a ‘two-tier’ system, it is more accurate to say that the end of double taxation removes a competitive disadvantage faced by Indian workers and their employers, thus creating a more level playing field.
What’s more, the Indian employer will still have to pay additional costs, including visa and sponsorship fees and the NHS surcharge.
The Indian government has been keener than ours to trumpet this part of the deal. But the reality is that the UK already has similar arrangements with many other countries. In some cases, notably Chile and Japan, these run up to five years.
It is also not obviously unfair that foreigners working here for only a limited period should be excused from paying into a social security system from which they will receive very little benefit.
Some still argue that the Indian deal poses a new and much greater threat, because India is a much larger and poorer country. But the NI exemption will still only apply to a relatively small number of professionals, rather than creating an open door for everybody.
What’s more, most foreign workers who are here temporarily are already exempt from paying NI for up to one year, and Indian workers are already often cheaper than British ones, so this new deal is not necessarily a game changer. If use of the scheme does explode, the eligibility criteria could still be tightened up.
Admittedly, there will be a cost to the UK Treasury in terms of lost NI receipts from Indian workers (as with any such scheme). Some have suggested a figure here of a ‘few hundred million’ pounds. But this needs to be seen in the context of a deal that could boost the UK economy (and hence tax revenues) by many billions.
This is still not entirely satisfactory. I have a lot of sympathy for those who fear that the DCC will be exploited or gamed in some way, or who are worried about the overall levels of immigration to the UK.
Government communications on this issue have also been poor, with no detailed impact assessment beyond the usual boilerplate analysis of the benefits of reducing trade barriers. And, of course, the optics of first raising NI for British workers, then cutting it for Indian workers, are terrible.
Nonetheless, the overall package is still a win-win for both sides. It is a shame that so many have leapt to condemn it based on what appears to be scaremongering about just one part.
Plain-speaking Economics 