Rules of origin: Stricter regime soon to screen FTA benefits

The concessional customs duties, including zero duty, under free-trade agreements (FTAs) would be available to importers only if they can prove that products have undergone value addition of at least 35% in the countries of origin, the finance ministry sources said. With more stringent rules coming into effect from September 21, an exporter’s certificate for ‘country of origin’ alone, which was sufficient earlier, will not be admissible.

A broad range of imports, including of mobile phones, set-top boxes, camera and various white goods, will come under stricter scrutiny as the government will enforce tougher customs rules to curb abuse of its FTAs with trading partners by unscrupulous elements. In many cases, the FTA partner countries have been claiming to have produced the goods in question without having the necessary technological capacity for the required value addition.

Customs officials have long suspected that China may be diverting its supplies to India through Asean nations, abusing rules of origin, to illegally take advantage of duty-free market access under the FTA. Given the latest border skirmish between India and China and the frosty political ties, the diversion may surge, they fear. The department has detected fraudulent claims under FTA to the tune of Rs 1,200 crore.

“Importers will now have to make a self-declaration in the bill of entry that the goods qualify for preferential rate of duty under that agreement. They will have to produce certificate of origin covering each item on which preferential rate of duty is claimed, and provide details such as country of origin certificate reference number, date of issuance of certificate of origin and originating criteria, among others,” an official said.

Another customs official said the new rules allow the department to reject the claim of ‘country of origin’ if certain discrepancies are observed. Further, customs officer will either accept furnished information from importers within 15 days or may initiate further verification from the exporting countries.

If no verification report is received from the agency in the exporting country within the prescribed time, the preferential treatment to goods would be denied. In the case of further verification, the importer will have to deposit full duty or furnish bank guarantee of equal value to take possession of imports.

“If it is found that benefit has been wrongly availed in respect of a consignment, the FTA benefit would be denied in subsequent shipment of identical goods (in terms of country of exports) and the importer will have to pay full applicable duty,” another official said. Further, if customs is satisfied with available information that imports do not quality for FTA benefits, it may be denied without any further verification.

In fact, after Singapore and Hong Kong, Vietnam has emerged as the third Asian trade partner, which counts on massive Chinese investments, to turn its usual trade deficit with India into a decent surplus in a span of just three years. Between FY18 and FY20, India’s trade balance with Vietnam swung from a surplus of $2.8 billion to a deficit of $2.2 billion, according to official data.

The Budget earlier this year had introduced a change in Section 28DA of the Customs Act that pertains to procedures regarding claim of preferential rate of duty. To tighten the rules of origin of imported products, the revenue department last month stipulated new rules for the importers.

Various FTAs have only caused India’s trade deficit to soar. For instance, in case of Asean members, the merchandise trade gap has risen from $5 billion in 2010, when the FTA with Asean was implemented, to over $22 billion now. Apart from Singapore and Vietnam, the trade gap has widened with Malaysia, Thailand and Indonesia as well.