FTA: New Rules of Origin meant to curb duty evasion, but Indian importers will bear onerous compliance burden

By Ajinkya G Mishra & Avani Tewari

International trade and commerce are critical to sustaining economic development of a country. To attain a high growth momentum, a country must engage in trade negotiations and agreements at multilateral, regional, and bilateral levels. India has been a party to several bilateral and regional trade agreements, and quite a few important ones are under negotiations and slated to be finalised soon. However, India’s experience with the trade agreements has so far been mixed:

Favourable trade balance mostly in the case of smaller partners, and deficit with the larger ones. This, coupled with the fact that trade agreements have been misused by availing preferential duty rate against the import of goods that did not meet the originating criteria, have only added to the government’s list of concerns.

To check the trade imbalance and misuse of duty benefit, the government has adopted a two-pronged strategy: Initiate renegotiation of trade agreements with partners; and legislate additional measures to check duty-evasion. Upon realising that the renegotiation of trade agreements entered with the government of a foreign country or economic union is likely to be protracted, the government has swiftly initiated legislative measures to deal with the misuse of trade agreements.

Earlier this year, the Customs Act was amended to provide for the administration of rules of origin under the trade agreements. To supplement the newly inserted provisions under the Customs Act, the government has recently notified rules for the administration of Rules of Origin under trade agreements. This latest rule, which has become effective from September 21, prescribes the guidelines and procedures to be followed by the importer while claiming a preferential rate of duty in terms of a trade agreement.

A significant feature of the new rules is that it makes it mandatory upon importers—claiming a preferential rate of duty—to possess information demonstrating how the ‘country of origin’ criteria stand satisfied. The rules empower the Customs authorities to requisition information about the fulfilment of the country of origin criteria for verification of certificate of origin. It will require the importer to disclose not just the production process concerning the imported goods, but also confidential information about the goods. Generally, the importer is neither privy to the production process nor in a position to demand the information.

Further, with the introduction of the new rules, a mere certificate of origin will not suffice for claiming a preferential rate of duty under FTAs. Instead, the importers will be required to ensure the value addition and possess and submit information and documents showcasing compliance with the rules of origin. While these latest measures are to curb duty evasion, importers, in general, will bear the brunt of the onerous compliance prescribed under the rules. Any non-compliance with the rules could result in liability in the form of underpaid tax and administrative penalties.

The new rules will require the importers who hitherto were availing preferential tariff rates to undertake a duty benefit versus compliance and risk assessment. It may lead some importers to either restructure their supply chain or even opt-out of the preferential tariff rate in favour of the most favoured nation (MFN) duty rate.

This latest move by the government is also inconsistent with the trade facilitation measures adopted by other countries and trading blocks. For instance, as a method of proof for the rule of origin, a self-certification system is introduced under the US-Japan Trade Agreement. Further, a self-certification scheme has also recently been implemented under the ASEAN Trade in Goods Agreement. The self-certification enables a certified exporter to make an origin declaration on certain commercial documents such as the invoice, bill of lading, delivery order, or packing list.

The need of the hour is to simplify the procedures and bring down the transaction cost. At the same time, importers must understand and apply correct trade agreement rules so that use of preferential tariffs can withstand scrutiny by Customs during post-entry audits and origin verification. The endeavour must be to ensure compliance with the Rules of Origin requirement by having internal mechanisms and processes, without making the existing trade agreement unworkable.

Mishra is partner and Tewari is associate, L&L Partners
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