COMMENTARY

Nepals Transit through India

An Assessment
Nisha Taneja, Samridhi Bimal, Isha Dayal

There are a large number of

inadequacies in the prevailing
IndiaNepal transit treaty. Issues
with regard to documentation
requirements, trans-shipment
procedures, sensitive items,
arbitrary bank guarantees, and
poor infrastructure have resulted
in considerably high transaction
costs for transit cargo. Although
the value of the total transit
trade through India has been
increasing, its share in Nepals
total trade with the world has
seen a decline during 200913.

Nisha Taneja (ntaneja@icrier.res.in), Samridhi

Bimal (sbimal@icrier.res.in), and Isha Dayal
(idayal@icrier.res.in) are at the Indian Council
for Research on International Economic
Relations, New Delhi.

18

epal, a landlocked country, relies

on transit access from neighbouring countries to participate in
international trade. For Nepal, the nearest
seaport is that of Kolkata in India. India is
not only Nepals major transit provider, but
also its top trading partner. Bilateral trade
with India accounts for almost 66.5% of
Nepals total trade with the world.
Nepals total trade with the world in
five years, from 2009 to 2013, rose from
$5 billion to $7.7 billion. Transit trade
through India has played an integral
role, allowing Nepal to access countries
through India. Exports from Nepal worth
$292.4 million, and imports to Nepal
worth $2.3 billion transited through
India in 2013, taking the total value of
transit trade to about $2.6 billion.1
Although the value of the total transit
trade through India has been increasing,
its share in Nepals total trade with the
world has seen a decline from 43.5% to
33.5% during 200913.
Transit arrangements between India
and Nepal are governed by two main
legal instruments: the IndiaNepal Treaty
of Trade and Transit, and the IndiaNepal
Rail Services Agreement (RSA).
This article attempts to highlight issues
and suggest measures to streamline
IndiaNepal transit trade and revise the
prevailing treaties as per international
standards, particularly the World Trade
Organizations (WTO) Trade Facilitation

Agreement (TFA) (World Trade Organization 2014).

There are a number of issues related to
movement of transit cargoes to/from the
Kolkata port, arising out of constraints in
the existing treaty, procedural obstacles,
and poor infrastructure, amongst others.
We highlight four key issues that require
urgent attention to make the transit
process smoother.
Submission of Documents
Actual documentary requirements are
higher than those specified in the transit
treaty (Nepal 2006; Adhikari and Kharel
2011). For instance, the RSA clearly
mentions that all copies of the Import
Containerised Cargo Declaration (ICCD),
along with copies of the bill of lading,
invoice, packing list, import licence
(wherever issued), and letter of credit
(certified by the consulate general) are
required for transit of cargo by rail. But
in practice, the importer has to submit
original copies of these documents in
Kolkata in the case of transit by rail.
Since the ICCD already contains entries
of these documents and the exporter
declares that these entries are correct,
the requirement to submit original
documents is an added burden on the
importer/exporter.
It is often the case that receiving these
original documents takes a long time and
arrival of the vessel precedes the submission of original documents. This results
in heavy demurrage charges at the port
that have to be borne by the importer.
Trans-shipment Modalities
The key issue related to trans-shipment
is that the modality followed for Indian
cargo movement from a gateway port to

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another Indian port/inland container

depot (ICD)/container freight station (CFS)
is not being followed for Nepal-bound
transit cargo. Section 54 of the Indian
Customs Act, 1962 lays down provisions
for trans-shipment of goods without
payment of duty for cargo imported into
a customs station in India for transshipment to any foreign port, provided
the destination port is mentioned in the
import manifest.
As per the provisions of the RSA, there
is requirement for the ICCD and copies of
the bill of lading, invoice, packing list,
import licence, and letter of credit to be
submitted at the Kolkata customs. However, under the trans-shipment procedure
of the Indian Customs Manual, when
cargo is manifest till the destination
port under a through bill of lading, the
importers or their authorised agents are
required to follow all customs formalities,
such as filing of bill of entry, assessment,
examination of goods, etc, for clearance
of the goods after safe landing of containers at the destination port/ICD/CFS. Since
shipping lines do not issue the bill of
lading till Birgunj, the documents have
to be submitted at the gateway port.
Currently, export/import transactions
are quoted on cost, insurance and freight
(CIF)/cost and freight (CFR) Kolkata terms.
If shipping lines file a through bill of
lading till the destination port, then
traders can quote transactions on CIF/CFR
Birgunj terms. The RSA will need to be
modified accordingly.
Insurance/Bank Guarantee
The transit treaty specifies that for transit
goods (other than sensitive goods as
specified by the Government of India,
comprising products for which Nepals
import duties are lower than Indian
duties) importers need to furnish a
legally binding undertaking covering
the difference between the market value
and the CIF value to the Indian customs
commissioner at Kolkata. For sensitive
goods, an insurance policy or a bank
guarantee is required to ensure that
Indian customs is able to realise the
duties in the case of the goods not
reaching Nepal. There are two major
problems in this case. The first relates to
the sensitive items list itself, and the
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second to the problems related to the

associated guarantees that have to be
executed by the importer to ensure that
duties will be paid to the Indian customs
if the goods do not reach Nepal.
In the first case, the basis of arriving
at the sensitive items list is not clear, nor
is the list made available in a timely
manner (Nepal 2006; South Asia Watch
on Trade, Economics and Environment
2012). Moreover, the Indian customs
duties have fallen considerably, reducing
the difference between Indian and
Nepali tariffs, which is an aspect that
must be taken into account (Table 1).
The second problem relates to the
need for Nepali importers to furnish
insurance or bank guarantee, which is
very burdensome. Given that only two
insurance companies, namely, the Indian
National Insurance Company and the
Oriental Insurance Company have the
authority to issue such guarantees, it
results in a high premium rate than if
more insurance companiesboth public
and privatewere permitted.
Lack of Infrastructure
Due to draft limitations at Kolkata and
Haldia ports, containers are being
transhipped en route and transported by
feeder vessels, resulting in unduly long

transit times and high transportation

costs (Pohit 2009). The available warehouse sheds and open space for Nepals
cargo on long-term lease at Kolkata and
Haldia are not adequate to cater to the
needs of Nepali containerised cargoes.
The lack of a separate container yard and
necessary equipment is hampering quick
dispatch of containers from the port.
The KolkataRaxaulBirgunjKathmandu transit corridor faces several infra
structural bottlenecks, which need to
be addressed. The quality of the road
corridor is very poor. The crossing close
to the checkpoint and the narrow 2-lane
bridge over the River Sirsiya near the
border pose significant transit challenges
(National Transport Development Policy
Committee 2014).
Soft infrastructure at the borders is
another issue. Both countries are in the
process of automating the customs procedures. However, while India follows
the ICEGATE system (Indian Customs
Electronic Commerce/Electronic Data
interchange [EC/EDI] Gateway), Nepal is
following the ASYCUDA ++ (Automated
SYstem for CUstoms DAta). The transit
module at Kolkata is operated manually
and the process of EDI is yet to be
completed. Also, due to lack of complete
automation, there is no electronic

Table 1: List of Sensitive Items with Tariffs

List of Sensitive Items

Watches and parts

Household electricals and electronic goods parts
Synthetic yarn and fabrics
Car air-conditioner
Car accessories and spare parts
Ferrous and non-ferrous scrap cathodes (99.9%)
Computers and parts
Compressor
Pharmaceutical bulk drugs formulations
Plastic
Bearings
Yarn
Photographic goods
Oxytetracycline
Fabrics, except cotton fabrics
Poppy seeds
Oil/fat of animal origin/tallow
Silk
Raw silk (tussar and others)
Spices
Coconut oil
RBD palmolein
Betel nuts

Nepal Tariff
(%) (1)

15
15
15
15
15
15
0
10
10
10
5
5
5
5
5
10
10
5
5
30
15
5
30

Indian Tariff
Band (%) (2)

Indian Tariff
(%) (3)

Difference
(4)=(1)-(3)

Can Be
Removed

10
0, 7.5, 10
10
10
10
10
0
7.5, 10
10
10
7.5
10
10
10
10,15
30
15, 30
10, 15, 30
30
30, 70, 100
100
100
150

10
10
10
10
10
10
0
10
10
10
7.5
10
10
10
15
30
30
30
30
70
100
100
150

5
5
5
5
5
5
0
0
0
0
-2.5
-5
-5
-5
-10
-20
-20
-25
-25
-40
-85
-95
-120

X
X
X
X
X
X
X
X
X
X
X
X
X

Source: Authors own calculations using tariffs provided by Indian and Nepal Customs, 2015.

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COMMENTARY

message exchange system between the

various authorities. At Birgunj, the automation systems have to be set up and
synchronised with the ICEGATE system.
For road transit cargo, customs and
port formalities take up to four days.
During transit, movement of trucks is
often affected by numerous checkpoints
on the route as well as informal payments that have to be made at the
checkpoints. The total turnaround time
in the case of road transit is 19 days
(Table 2).
Even in the case of rail transit cargo,
the reasons for the average time of 5 days
to complete customs and port formalities
are more or less the same. The total
turnaround time in the case of rail transit cargo goes up to 26 days (Table 3).
From our interactions with several
freight forwarders, we have arrived at an
estimate for ideal time2 for undertaking transit by road and rail. In the case of
complete automation, the ideal time is
assumed to be the most efficient and the
best scenario that would govern India
Nepal transit trade in the cases of both
road and rail. This indicator can be used
to evaluate the inefficiency of the current
transit procedures too. For instance, transit by road takes 2.7 times longer than it
should ideally take, while transit by rail
takes 2.4 times longer than it should
ideally take.
As a WTO member, Nepals trade and
transit procedures are governed by the
General Agreement on Tariffs and Trade
(GATT) principles; especially Article 5 on
Freedom of Transit, which has further
been clarified and improved upon in the
recent TFA. Provisions for facilitating
transit in Article 11 of the TFA have phenomenal relevance for revising the India
Nepal transit treaty and prevailing transit
arrangements (Table 4).
Thus, when both India and Nepal are
able to meet the requirements of the TFA
related to transit, it would make a
tremendous difference to the cost of
transporting goods from Nepal to the
rest of the world through India.
Addressing Inadequacies
There are a large number of inadequacies
in the prevailing IndiaNepal transit
treaty encompassing issues with regard to
20

documentation requirements, transshipment procedures, sensitive items,

arbitrary bank guarantees, and poor
infrastructure. All of these inadequacies
have resulted in considerably high transaction costs for transit cargo, when measured as the time taken to complete transit

formalities. Transit by road takes 2.7 times

longer and transit by rail 2.4 times longer
than it must ideally take under the most
efficient conditions. Nepal must, therefore,
aim to amend its transit treaties with India
in line with internationally recognised
practices as emphasised under the TFA

Table 2: Transaction Cost for Road Transit Cargo

Customs and Port
Formalities

Average time taken (in days)

Ideal time

Transit Time
Laden

At ICD Birgunj

5
2

2
2

4
0

Transit Time
Empty Direction
and Arrival at
Kolkata

8
3

Turnaround

19
7

Source: Information elicited from freight forwarders in Kolkata, Birgunj and Kathmandu.

Table 3: Transaction Cost for Rail Transit Cargo

Average time taken (in days)

Ideal Time (in days)

Customs
and Port
Formalities

F/Note to
Rake Offer
at Kolkata

Rake
Offer to
Dispatch

5
0

4
2

2
0

Transit
Time Laden

At ICD
Birgunj

4
3

Transit Time Turnaround

Empty Direction
and Arrival
at Kolkata

7
1

4
5

26
11

Source: Information elicited from freight forwarders in Kolkata, Birgunj and Kathmandu.

Table 4: Relevance of Trade Facilitation Agreement for IndiaNepal Transit

Issue

Revision of Treaty as per Article 11: Freedom of Transit in TFA

List of sensitive
items

According to the TFA, any regulation in connection with traffic in transit imposed by a
member should not be maintained if the circumstances giving rise to their adoption no
longer exist. In recent years, tariff rates in India have declined substantially, leaving little
(Article 11, Para 1) difference between Indian and Nepali tariff. Under these changed circumstances the list
of sensitive items for IndiaNepal transit trade should be reviewed.
Infrastructure to Draft limitations at Kolkata and Haldia ports, lack of adequate warehouses and container
facilitate traffic yards for Nepal-bound cargo containers, poor quality of roads on transit routes, and
in transit
congestion at border points have adversely affected transit trade through India. As stated
in the TFA, member countries should be encouraged to build and provide physically
(Article 11, Para 5) separate infrastructure to facilitate traffic in transit that would be an important step in
cutting down transit time and costs.
Transit-related Currently, a large number of documents are required in original in support of transit of
documentation cargo by road and rail. To meet the requirements of the TFA, India and Nepal must limit
the documentation to just those that are necessary to identify the goods and ensure
(Article 11, Para 6) fulfilment of transit requirements.
Customs charges, According to the TFA, any good in transit must not be subject to any customs charges, nor
delays and
unnecessary delays or restrictions from the point of origin in a member country until its
restrictions
destination within the members territory. Collection of informal charges and payments
for goods en route to Nepal, while crossing different states in India, must therefore be
(Article 11, Para 7) eliminated.
Pre-arrival
At present, processing of transit documents at ports takes place only after the arrival of
processing
original documents, resulting in delays in release and clearance of goods for onward
movement. The TFA necessitates members to allow and provide for advance filing and
(Article 11, Para 9) processing of transit documentation and data prior to arrival of goods. Use of electronic
systems for this purpose will further help expedite IndiaNepal transit trade.
Guarantees
Furnishing an insurance or bank guarantee for goods transiting through India is
burdensome for Nepali importers, especially when an inflated market value of goods is
(Article 11,
affixed, and a high premium is charged due to the monopoly enjoyed by the only two
Para 1115)
insurance companies having the authority to issue such guarantees. Abiding by the
provisions of the TFA will help in the following ways:
Ensuring that the guarantee is limited to just the fulfilment of transit procedure.
Discharging the guarantee without delay once transit requirements have been satisfied.
Allowing for multiple guarantees or renewal of guarantees without discharge for
subsequent consignments, that is, a comprehensive guarantee system.
Encouraging transparency with regard to providing public information on how the
guarantee has been set.
Allowing for the use of trade customs convoys in circumstances of high risk or absence
of guarantees.
National transit According to the TFA, India and Nepal must endeavour to appoint a national transit
coordinator
coordinator to ensure efficient and streamlined functioning of transit operations. The
coordinator can help redress all queries and inefficiencies arising in IndiaNepal
(Article 11, Para 17) transit trade.
Source: Authors compilation through critical assessment of the IndiaNepal transit treaty and WTO TFA.

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and the Vienna Programme of Action for

Landlocked Developing Countries for the
Decade 201424 (United Nations 2014);
both specify measures that Nepal and
India must be prepared to undertake.
The two programmes also encourage
member countries to ratify international
transport and transit conventions, and
international standards in trade and
transit processes, which the two countries must explore in the long run.
notes
1

The value of transit trade has been calculated

by the authors by subtracting Nepals bilateral
trade with India from Nepals trade with the

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world, using data from Ministry of Commerce

and Supplies, Government of Nepal.
Ideal time has been arrived at based on the perception of freight forwarders. The numbers
should be treated with caution.

References
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Trade, Economics and Environment, Kathmandu, Nepal.
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Planning Commission, Government of India,
New Delhi, pp 61875.

vol l no 45

Nepal, V N (2006): Policy Reorientation Study on

Transit Trade of Nepal, Policy Paper No 20,
Economic Policy Network, Ministry of Finance,
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Pohit, S (2009): Overview of IndiaNepal Trade:
Trends, Trade Logistics and Impediments,
MPRA Paper No 45874, Munich Personal RePEc
Archive, https://mpra.ub.uni-muenchen.de/id/
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