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 (R OO) 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 barri ers include tariff barriers like taxes and
non tariff barriers like regulatory laws.
India has 42 trade agreem
ents (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 I ndia’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),
India ASEAN Comprehensive Economic Cooperation Agreement (CECA),
India Korea Co mprehensive 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, i t 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 measur
Government of India is focused on reducing the trade deficit and initiating measures to es to achieve this objective from quite some time. The trade deficit stood at USD 118.1 billion in achieve this objective from quite some time. The trade deficit stood at USD 118.1 billion in the period Aprilthe period April–December 2019. There is also a growing concern that cheap quality imports December 2019. There is also a growing concern that cheap quality imports are dumped into India under the garb of preferential tariff under are dumped into India under the garb of preferential tariff under trade agreements. trade agreements. Directorate of Revenue Intelligence (DRI) had reported several cases of abuse of Rules of 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 origin provisions and submission of fake documents to claim the benefit of preferential tariff under FTAs. Cheap and uncontrolled imports harm the eunder FTAs. Cheap and uncontrolled imports harm the economy in multiple ways; it harms conomy in multiple ways; it harms the domestic industry by denying them a level playing field visthe domestic industry by denying them a level playing field vis–àà–vis imports and more vis imports and more dangerously, there is dumping of subdangerously, there is dumping of sub–standard goods in the country. standard goods in the country.
In this backdrop, the Government has proposed to add a new Section 28DA in the Customs
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 Act, 1962 which is an enabling provision under a new chapter VAA to administer the preferential tariff treatment regime under the FTA. preferential tariff treatment regime under the FTA.
Following are the important features of the proposed provisions-
1.
1. Submitting the Certificate of Origin (COO) will not absolve the importer Submitting the Certificate of Origin (COO) will not absolve the importer from the from the responsibility to exercise reasonable care to ensure that the responsibility to exercise reasonable care to ensure that the RRules of origin criteria is ules of origin criteria is fulfilled.fulfilled.
2.
2. Onus on importer to maintain and produce requisite documents and information related Onus on importer to maintain and produce requisite documents and information related to origin of goods.to origin of goods.
3.
3. Time bound verification from exporting countryTime bound verification from exporting country..
4.
4. Pending verification, goods shall be cleared only after furnishing a security of equivalent Pending verification, goods shall be cleared only after furnishing a security of equivalent amount of apamount of applicable duty.plicable duty.
5.
5. Customs are empowered to deny the claim for preferential tariff based on the information Customs are empowered to deny the claim for preferential tariff based on the information obtained from importers and other available information.obtained from importers and other available information.
The above provisions are introduced to ensure a self
The above provisions are introduced to ensure a self–contained mechanism to check misuse contained mechanism to check misuse of rules of origin of imported goods under preferential trof rules of origin of imported goods under preferential trade.ade.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
POTENTIAL IMPLICATIONS OF THE NEWLY ADDED PROVISIONS
1.
1. Failure to provide the requisite information relatFailure to provide the requisite information related to origin of goods may lead to further ed to origin of goods may lead to further verificationverification..
2.
2. Temporary suspension of preferential tariff treatmentTemporary suspension of preferential tariff treatment..
3.
3. Provisional assessment of goods and release only upon furnishing a security amount Provisional assessment of goods and release only upon furnishing a security amount equivalent to the difference in duty provisionally assessed and the preferential duty equivalent to the difference in duty provisionally assessed and the preferential duty claimed leadinclaimed leading to additional costs for the importerg to additional costs for the importer..
4.
4. Customs may seek information within a period of five years from date of claim for Customs may seek information within a period of five years from date of claim for preferential tariff leading to an investigation on previous transactionspreferential tariff leading to an investigation on previous transactions
5.
5. NonNon–compliance will lead to rejection of claim for preferential tariff for identical products compliance will lead to rejection of claim for preferential tariff for identical products imported from the origin country and the producerimported from the origin country and the producer
DUE DILIGENCE TO BE DONE BY IMPORTERS CLAIMING PREFERENTIAL TARIFF
1.
1. Detailed understanding of the Rules of Detailed understanding of the Rules of oorigin criteria and product specific conditions of rigin criteria and product specific conditions of an FTAan FTA..
2.
2. Present a declaration that goods qualify and Present a declaration that goods qualify and fulfilfulfil the Rules of origin conditions under an the Rules of origin conditions under an FTA for preferential tariffFTA for preferential tariff..
3.
3. Possess sufficient information with regards to the followingPossess sufficient information with regards to the following::
• Authenticity of the Certificate of Origin (COO)Authenticity of the Certificate of Origin (COO)..
• Sufficient details about wholly obtained and not wholly obtained productsSufficient details about wholly obtained and not wholly obtained products..
• Methodology of Direct and Indirect method adopted to derive regional value contentMethodology of Direct and Indirect method adopted to derive regional value content..
• Details of value of nonDetails of value of non–originating materialsoriginating materials..
4.
4. Thorough understanding of operations and processing of products undertaken bThorough understanding of operations and processing of products undertaken by origin y origin country which will not qualify for preferential tariff under an FTA.country which will not qualify for preferential tariff under an FTA.
5.
5. Details pertaining to change in Details pertaining to change in tariff classification of nontariff classification of non–originating material used in originating material used in productionproduction..
6.
6. Where identical and interchangeable originating and nonWhere identical and interchangeable originating and non–originating materials are used originating materials are used in the manufacture of in the manufacture of a producta product,, ddetails of the accounting method etails of the accounting method for segregation for segregation applied applied by theby the manufacturer/exporter in accordance with Generally Accepted manufacturer/exporter in accordance with Generally Accepted Accounting Accounting Principles Principles (GAAP) (GAAP) applicable in the Country of manufacturing/Country of origin.applicable in the Country of manufacturing/Country of origin.
RECENT CHANGES
In connection with the above, a new Customs (Administration of Rules of Origin Under Trade Agreement) Rules, 2020 has been introduced which would take effect from September 21, 2020. This rule deals with imported goods under preferential rate of duty in terms of trade agreements.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
Preliminary conditions for a Preferential tariff claim
To claim preferential rate of duty under a trade agreement, the importer or his agent shall, at the time of filing bill of entry:
(a) make a declaration in the bill of entry that the goods qualify as originating goods for preferential rate of duty under that agreement;
(b) indicate in the bill of entry the respective tariff notification against each item on which preferential rate of duty is claimed;
(c) produce Certificate of Origin covering each item on which preferential rate of duty is claimed; and
(d) enter details of Certificate of Origin in the bill of entry, namely:
(i) certificate of origin reference number;
(ii) date of issuance of certificate of origin;
(iii) originating criteria;
(iv) indicate if accumulation/cumulation is applied;
(v) indicate if the certificate of origin is issued by a third country (back-to-back); and (vi) indicate if goods have been transported directly from country of origin.
Grounds of denial of preferential tariff claim
The pertinent part to note the Non-obstante clause that sets out that Notwithstanding anything contained in these rules, the claim of preferential rate of duty may be denied by the proper officer without verification if the certificate of origin:
(a) is incomplete and not in accordance with the format as prescribed by the Rules of Origin;
(b) has any alteration not authenticated by the Issuing Authority;
(c) is produced after its validity period has expired; or
(d) is issued for an item which is not eligible for preferential tariff treatment under the trade agreement;
and in all such cases, the certificate shall be marked as “INAPPLICABLE”.
Responsibility of Importer claiming preferential tariff
The new Rules mandate that the importer who is claiming the preferential rate of duty shall possess information in terms of the designated Form (FORM I) to demonstrate the manner in which country of origin criteria, including the regional value content and produce specific criteria as specified are satisfied and submit the same as requested for. The importer is also expected to exercise reasonable care to ensure the accuracy and truthfulness of the aforesaid information and documents.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
This places an enormous onus on an average importer who prefers to opt for the preferential rate of duty under an agreement for he may not be in possession of all the information beyond the getting the Certificate of Origin from the verification authority at the other end of the cross border.
Other salient features of the Rule
1. The new Rules not only imposes the verification process before or during the import of goods but also empowers the proper office to seek information after the customs clearance as well as supporting documents to ascertain the correctness of the claims and if found insufficient for the verification proposal to be forwarded to the nodal office. A non obstante clause has also been added for the principal commissioner to reject the claim of preferential rate of duty.
2. The Rules also allows for rejection of the preferential duty on goods originating from an exporter or producer, who do not meet the origin criterion, on other claim of preferential rate of duty filed prior to or after such determination, for identical goods imported.
3. The Rules further mandate that where the imported has not provided the requisite information and documents prescribed, or where it has been established that he has failed to exercise reasonable care to ensure the accuracy and truthfulness of the information furnished under the rules, the proper officer may prevent any possible misuse of a trade agreement.
The hefty onus on the importer
It is pertinent to note that the Onus or the burden of proof is heavily thrust on the importer by the mandate that In terms of section 28DA of the Customs Act, 1962, an importer making a claim for preferential rate of duty is required to possess sufficient information as regards the manner in which country of origin criteria, including the regional value content and product specific criteria, specified in the rules of origin in the trade agreement, are satisfied. While seeking information from the Verification authority from the exporting country to understand the genuineness of the transaction would really serve the purpose of ascertaining if the contours of the cross border trade agreement based claim of lower preferential duties would be absolutely in order, the burden of proof on the importer appears to be a tad heavy in terms of adhering to the execution of the bona fide.
The Rules also mandates that pending the response of the verification authority, the preferential rate may be suspended till the conclusion of the verification.
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
ANNEXURE – FORM I
Form I is prescribed under rule 4 of Customs (Administration of Rules of Origin Under Trade Agreement) Rules, 2020 (refer Notification No.81/2020 – Customs(N.T.) dated August 21, 2020). The said Form is classified into 3 sections. A brief of the three sections is given as under to understand the impact of the same.
Section I – It sets out the guidance for filling up the said form. It also gives the various methodologies to arrive at for the purpose of understanding the originating country or otherwise and also mandates a reading of the Rules of Origin as well as the content of the preferential agreement per se in addition to this set of Rules.
Section II – Relates to facts to be filled in after filing the BOE.
Section III – This is the most critical part of the form that sets out the revised Rules of Origin from the new Rules perspective.
It pertains to the list of information an importer is to have in possession before the goods are imported. This would be possible only if the importer is to import the goods form a cross border exporter who will in addition to procuring a certification of origin will also have the relevant data and information about all the products that have gone in to the goods especially if the entire goods are not manufactured/originates in that country.
The Form I introduced need to be filled in by the importer who wishes to claim a preferential rate under agreement. The rule sets out that the Form contains a list of basic minimum information which an importer is required to possess while importing the goods and Section 28DA of the Act further requires that the importer shall exercise reasonable care to ensure accuracy and truthfulness of the information supplied and the preferential claim and therefore, any additional information, as deemed fit to ascertain correctness of the country of origin criterion, may also be obtained. It would also be in the interest of the importer as well as revenue, if the entire list of documents or details that are warranted to be furnished by the importer to be set out explicitly rather than leaving it to the prerogative of the authorities.
Way forward.
The Government appears to be totally “Walking the talk” in their “go vocal for loca”l approach. While the burden of proof is heavily thrust on the importer, it would lead to the average importer (not the heavy duty Corporate Conglomerate) to be distressed in reaching out the exporter of the other country to seek the details which may not be readily forthcoming unless the imported quantities are huge. Further, having signed a FTA, it is a tad unfair for the Government to deny
Tighter origin norms under FTA: Onus on importers seeking preferential tariff
the preferential rate if the “Verification Authority” which is the designated authority of the other country not furnishing the requisite information. This would be like penalising the average imported for no fault of his. It goes against the grain of the FTA arrangement itself.
India Inc. for its part have to tread with caution. It has to do business with established exporters of other countries which will be willing to part with information and documentary evidence that the Indian Customs Authorities might seek.
For inputs/further clarification on the above write-up, please do get in touch with NV Raman, Founder Partner of Novello Advisors at [email protected]