In today’s globalised economy, countries have put in place measures to encourage bilateral and multilateral trade through trade agreements. India too has entered into free trade agreements (FTA) with various countries – bilateral trade agreements with Japan, Singapore, etc. and multilateral trade agreements with ASEAN countries, SAARC countries, etc. India is also negotiating trade agreements with Australia, Israel, European Union and the Gulf Cooperation Council, etc.
A key benefit under FTAs is preferential tariff, i.e. applicability of lower customs duty on import of goods from partner countries.
India has notified separate rules for determining whether goods being imported from a country are eligible for preferential tariff benefit under FTA arrangement. These rules also prescribe the procedure for determining the “origin” of goods from these countries and the documents to be submitted by importers.
Recent procedural changes for claiming duty benefits under FTAs
Importers were required to submit only a Certificate of Origin (CoO) at the time of import for claiming benefit of preferential tariff along with invoice and bill of entry. For verification of CoO, customs authorities were required to approach the relevant governmental authority of the exporting country.
In the Union Budget 2020, the Finance Minister had highlighted that imports under FTAs are on the rise. Also, an observation was made that benefits under FTAs were being misused which caused an adverse effect to the domestic industry. A change was, therefore, made in the customs law where provisions relating to stringent checks on imports under FTAs were introduced.
While the provisions of Customs law brought out the enabling provisions for undertaking the checks, the procedure has been provided in the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTA Rules) to claim preferential tariff benefits under FTAs. The CAROTA Rules are effective from 21 September 2020 and importers would have to comply with these provisions in order to claim preferential tariff benefit.
Additional compliances to be undertaken by importers
As per the CAROTA Rules, apart from CoO, importers are required to submit additional information in relation to the goods, at the time of import itself. Importers would now be required to give a declaration that the goods qualify as originating goods for a preferential rate of duty under the relevant FTA. Also, details relating to the CoO, such as reference number, date of issuance, etc., would also need to be furnished in such a declaration while filing the bill of entry.
Importers are required to possess relevant information related to country of origin criteria, including the manufacturing process, regional value content, product specific criteria etc. Such information is required to be preserved for a period of 5 years from the import.
The authorities are now empowered to conduct a detailed investigation into the claim of preferential tariff. If the authorities have “reason to believe” that the country of origin criteria has not been met by importers, investigation can be undertaken. Thus, powers of the customs authorities have also been widened through the introduction of the new provisions governing administration of Rules of Origin.
The authorities can also deny the benefit if there are issues such as the CoO being incomplete, alteration in CoO not being authenticated by the competent authority, etc. without verification.
Authorities can also approach a designated authority for further verification with the exporting country to examine the authenticity of the preferential tariff claims of importers.
The onus is now on importers to have the necessary information regarding the origin of goods, even before importing goods into India. Importers need to exercise “reasonable care” as to the accuracy and truthfulness of the information furnished. Mere submission of CoO would not mean that importers are exercising reasonable care for claiming preferential tariff benefit. Therefore, more responsibility has been placed on importers under the new provisions.
Way forward for importers
Importers utilise benefits under FTAs to sustain themselves in a competitive world. Though such imports may undergo stringent checks in the new environment, a few changes to the business processes can be made, to prepare in case of scrutiny.
Importers should start a dialogue with the overseas supplier seeking information about the goods (such as the production process followed by the supplier) even before import into India and also build comfort regarding the authenticity of the claim of preferential tariff benefit. Maintaining a proper audit trail of documents containing information about the manufacturing process, regional value content, product specific criteria etc. would help in responding to the queries of the authorities.
Suitable clauses to the procurement agreement can be added by the importers for safeguarding against any liability which may arise due to incorrect information provided by the overseas supplier.
Importers need to adhere to the new stricter norms for claiming preferential tariff benefit. Importers should build a robust mechanism to gather information about the goods being imported, well in advance, for effective supply chain management.
(Saloni Roy is Senior Director and Ankur Goel is Senior Manager, Deloitte Haskins and Sells LLP)