The Indian Finance Act, 2020 incorporated many changes in the customs law and procedures, including administration of Rules of Origin under Trade Agreements. A new Chapter VAA has been incorporated in the Customs Act, 1962 with an enabling provision for administering the preferential tariff treatment regime under various trade agreements, including free trade agreements (FTAs), etc.
As per WTO's statistics, there are 305 regional trade agreements in force as on date, and majority of the international trade takes place under these agreements. India has entered into 15 free trade agreements, and one unilateral DFTP (Duty Free Tariff Preference) Scheme.
Accordingly, Chapter VAA and section 28DA were inserted in the Customs Act, 1962, vide clause 110 of Finance Act, 2020. The new section inter alia provides for "a basic level of due diligence" on the part of an importer to satisfy himself that the claimed originating criteria have been met, and that mere submission of a Certificate of Origin may not be sufficient. For this purpose, the importer is required to possess "sufficient" origin related information. The first point of query into origin of goods, in case of doubt, will now be the importer, shifting from G2G to B2G model.
Section 28DA further provides for verification of origin from foreign authorities, temporary suspension of preferential treatment, and situations under which a claim can be denied or a certificate can be rejected.
Under Customers Act, India issued a Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR,2020) dated 21st August, 2020, to be implemented from 21st September. Thus, 30 days' time has been given to importers and other stake holders to get familiarised with the new provisions. The customs officer has given a discretionary authority to deal with "doubt" on genuineness/authenticity of the Certificate of Origin (COO) or on the accuracy of the information contained therein. The officer also is empowered to send verification request to the designated authority in the exporting country through a nodal officer in the importing country.
The Rule (sec 4) requires an importer to possess sufficient information about the origin of goods, where preferential tariff treatment is claimed. To help guide importers and also to indicate the scope of such information, details have been provided in the Form I of CAROTAR, 2020. An importer is not required to submit the said form at the time of filing customs declaration. However, when there is a doubt on the declared country of origin, the customs officer may ask for origin-related details from the importer, in which case the importer would have to submit the form along with supporting documents.
The form focusses on the process through which a product has attained origin i.e. if goods are produced entirely from inputs from that country or also included inputs from a third country. Even an input such as preservative should be added to the cost of materials (by value or weight). In a formation, the percentage of preservative in a product may be 0.03 - 0.05 per cent. If a supplier/producer mentions that goods have non-originating components but meets the originating criteria, it is advised to check if the claimed originating criteria apply to that specific tariff heading. An importer should ask these questions to exporter to ensure that the claim is valid and to diminish chances of erroneous claim.
Section 28DA of the Customs Act requires an importer to possess sufficient information about origin of imports, where preferential tariff treatment has been claimed. Form-I helps guide and assist an importer in assessing origin of goods. Moreover, the importer is required to keep origin-related information specific to each Bill of Exchange (BE) for minimum five years from date of filing BE. It has mandated the inclusion of specific origin-related information in the BE to provide for a scenario wherein verification from an exporting country can be initiated.
This new rule is frightening for an Indian importer because of the fate of consignments from SAPTA countries due to uncertainty of tax. This uncertainty will remain even up to five years after the import. The import volume from Bangladesh and other SAPTA countries may drastically fall due to such stringent rules and discretionary authority of the customs official. The request for verification may be sent within five years from the date of a claim of preferential tariff treatment, unless specified otherwise in the trade agreement. The preferential tariff treatment to the goods can also be temporarily suspended pending the verification. Further, according to amendments in Section 111 of the Customs Act, relating to confiscation of goods, the goods imported under claim of preferential tariff treatment and found to contravene the provisions of the new Chapter VAA or the Rules, will also be liable for confiscation.
Each FTA contains a set of rules of origin, which prescribe the criteria that must be fulfilled for goods to attain 'originating status' in the exporting country. Such criteria are generally based on factors such as domestic value addition and substantial transformation in the course of manufacturing/processing. For instance, the originating criteria finalized under a trade agreement could be domestic value addition of minimum 30% plus substantial transformation through Change in Tariff Sub-Heading (CTSH). Under the South Asian Free Trade Area (SAFTA), the general criteria are Change of Tariff Heading (CTH) plus 30 per cent for LDCs, vs. 40 per cent for non-LDCs.
The law has amended giving discretionary power to the customs official and they can apply the investigation according to their choice. Indian authority is very sensitive about export from neighbouring countries including Bangladesh and China. Bangladesh presently enjoys tariff preferences in the Indian market under three regional agreements. These are SAARC Preferential Trading Agreement (SAPTA), South Asian Free Trade Area (SAFTA), and APTA. The new customs rules of India will come as a barrier to the duty preferences given under these regional deals.
A government agency in Bangladesh has suggested retaliation by issuing similar harsh rules unless India agrees to withdraw its newly-enacted customs rules, which are likely to make it tough for Bangladesh to get tariff preferences. The Export Promotion Bureau (EPB) also suggested engaging the South Asian Association for Regional Cooperation (SAARC) and the Asia-Pacific Trade Agreement (APTA) secretariats in negotiations with India for the withdrawal of new rules.
M S Siddiqui is a Legal Economist