Tighter origin norms under FTA: Onus on importers seeking preferential tariff
It was announced by the Hon’ble Finance Minister during the Budget session that many of
the claims of drawing the benefits of the Free Trade Arrangements are impairing the interests
of the domestic manufacturers, pursuant to which it is widely expected that the Rules of
Origin (ROO) are expected to be tightened shortly. This would put a great onus of burden on
the imported who have opted/are opting for the Customs duty benefits under the FTAs.
India and the Brush with Free Trade Agreements (FTAs)-
A Free Trade Agreement is an agreement between individual countries or group of countries
to reduce or eliminate barriers to trade. Trade barriers include tariff barriers like taxes and
nontariff barriers like regulatory laws.
India has 42 trade agreements (including preferential agreements) either in effect or signed
or under negotiation or proposed. Out of this, 13 are in effect, one is signed but not yet
implemented, 16 are under negotiations and 12 are proposed/under consultation or study.
Most of India’s existing FTAs are with Asian countries which are quite different from each
other in terms of the level of their economic development. The major FTAs that India has
signed and implemented so far include South Asia Free Trade Agreement (SAFTA), IndiaASEAN Comprehensive Economic Cooperation Agreement (CECA), India-Korea
Comprehensive Economic Partnership Agreement (CEPA) and India-Japan CEPA.
The trade agreements clearly define the products under consideration and Rules of Origin
conditions to be fulfilled to claim the benefit of such preferential treatment
Rules of Origin
Rules of origin play a very important role in a Free Trade Agreement as it is designed with a
purpose to ensure that only the goods originating from member countries of the agreement
receive the preferential treatment. Rules of origin take into account the origin of the product,
inputs at the manufacturing stage, value addition, final processing etc. Therefore, it is
imperative for countries to have an identifiable mechanism to administer imports and exports
made under the agreement.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
Background
Government of India is focused on reducing the trade deficit and initiating measures to
achieve the objective from quite some time. The trade deficit stood at USD 118.1 billion in
the period April-December 2019. There is also a growing concern that cheap quality imports
are dumped into India under the garb of preferential tariff under trade agreements.
Directorate of Revenue Intelligence (DRI) had reported several cases of abuse of rules of
origin provisions and submission of fake documents to claim the benefit of preferential tariff
under FTAs. Cheap and uncontrolled imports harm the economy in multiple ways; it harms
the domestic industry by denying them a level playing field vis-à-vis imports and more
dangerously, there is dumping of sub-standard goods in the country.
In this backdrop, the Government has proposed to add a new Section 28DA in the Customs
Act, 1962 which is an enabling provision under a new chapter VAA to administer the
preferential tariff treatment regime under an FTA.
Following are the important features of the proposed provisions1. Submitting the Certificate of Origin (COO) will not absolve the importer
from the responsibility to exercise reasonable care to ensure that the
rules of origin criteria is fulfilled.
2. Onus on importer to maintain and produce requisite documents and
information related to origin of goods.
3. Time bound verification from exporting country
4. Pending verification, goods shall be cleared only after furnishing a
security of equivalent amount of applicable duty.
5. Customs are empowered to deny the claim for preferential tariff based
on the information obtained from importers and other available
information.
The above provisions are introduced to ensure a self-contained mechanism to check misuse
of rules of origin of imported goods under preferential trade.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
Potential implications of the newly added provisions
1. Failure to provide the requisite information related to origin of goods may lead
to further verification
2. Temporary suspension of preferential tariff treatment
3. Provisional assessment of goods and release only upon furnishing a security
amount equivalent to the difference in duty provisionally assessed and the
preferential duty claimed leading to additional costs for the importer
4. Customs may seek information within a period of five years from date of claim
for preferential tariff leading to an investigation on previous transactions
5. Non-compliance will lead to rejection of claim for preferential tariff for identical
products imported from the origin country and the producer
Due diligence to be done by importers claiming preferential tariff
1) Detailed understanding of the Rules of Origin criteria and product specific conditions
of an FTA
2) Present a declaration that goods qualify and fulfil the Rules of origin conditions under
an FTA for preferential tariff
3) Possess sufficient information with regards to the following-
• Authenticity of the Certificate of Origin (COO)
• Sufficient details about wholly obtained and not wholly obtained products
• Methodology of Direct and Indirect method adopted to derive regional value
content
• Details of value of non-originating materials
4) Thorough understanding of operations and processing of products undertaken by
origin country which will not qualify for preferential tariff under an FTA.
5) Details pertaining to change in tariff classification of non-originating material used in
production
6) Where identical and interchangeable originating and non-originating materials are
used in the manufacture of a product. details of the accounting segregation method
applied by the manufacturer/exporter in accordance with Generally Accepted
Principles applicable in the Country of manufacturing/Country of origin.
For inputs/further clarification on the above write-up, please do get in touch with N V Raman Founder Partner of Novello Advisors at [email protected]