New Rules of Origin: India attempts to thwart import of Chinese goods under FTAs

By Reena Asthana Khair, Senior Partner, and Head, International Trade & Indirect Taxation, Kochhar & Co.

Introduction:

The balance of trade between India and China continues to be heavily tilted in favour of China. Trade remedies such as anti-dumping and countervailing duties have been used frequently by India to curtail the import of Chinese goods. To overcome such barriers, it is alleged that China has been routing its goods through countries with whom India has entered into Free Trade Agreements (FTA). The strategy deployed is that intermediates are exported from China into these countries, and after undergoing minimal processing, goods are then exported to India under the relevant FTAs.

The ASEAN countries, for instance, have seen a spurt in the import of Chinese goods, for export production to the rest of the world. Subsidies extended to Chinese companies also get passed on through these intermediate goods, and the benefit of concessional duty under the FTAs makes exports from these countries very competitive. It has been the long-standing demand of the Indian Industry to take remedial action against such imports.

New Regulations introduced to curb misuse of FTAs:

With the introduction of Section 28DA of the Customs Act, 1962 and the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, (‘CAROTAR’) stringent measures for verification of the origin of FTA imports have been introduced to curb misuse. The certificates of origin issued by the exporting countries are no longer sufficient to establish origin and importers are being called upon to provide information adequate for independent verification of origin. India is in effect treating the certificates of origin issued by the exporting countries as inconclusive on the issue of origin.

Under the new measures, the importer is required to make a declaration as to the origin. It must also obtain relevant information from the exporter in support of its claim while exercising reasonable care as to the truth and accuracy of such information. The importer would normally not have any direct knowledge of the information furnished nor any means to verify the correctness thereof, as this information is in the exclusive possession and knowledge of the foreign exporter. The consequence of any incorrect or incomplete information would also have to be faced by the importer, such as the confiscation of goods and penalties.

Pursuant to the aforesaid regulatory amendments that are introduced, it is only where there is a cooperation between the exporter and importer, that the benefit of the concession can be availed. The exporter would have to provide to the importer complete information as to how the conditions of origin are met under the various criterion, such as change in HSN tariff classification at the 4 or 6 digit level, regional or domestic value content, or process rule.

For a claim on heading change, the exporter would have to provide to the importer adequate material to demonstrate that the classification of the inputs, is different from that of the final product. For a claim under the domestic value content direct method, the exporter would have to share information on its costs and profits. Under the indirect method, the value of non-originating material, along with such material’s source, would have to be disclosed to the importers. The process details would also have to be shared with the importer.

Consequences of CAROTAR and related Statutory Amendments:

The aforesaid amendments to the Customs Act and the introduction of CAROTAR are likely to be most problematic for units in the MSME sector and smaller traders, who would not have much clout with foreign exporters.  Imports may get concentrated in the hands of a few, to the detriment of smaller players.

Further, the new measures are bound to create strain and mistrust between India and its trading partners, as imports legitimately covered under the FTAs, could face unnecessary scrutiny, and delay. The exporters will have to establish origin twice, once in the exporting country, and then again in India.   There may be reluctance on the part of exporters to share commercially sensitive information with their customers.

Lastly, the said Rules appear to impose an unsustainably high burden on Indian importers to elicit business-sensitive information from exporters. Though well-intentioned to curb misuse of FTAs, the increased regulatory compliances above may end up arresting the pace of international trade, and ultimately manufacturing revival and economic growth in India.

Conclusion:

While the legislative intent behind CAROTAR is laudable, for the new measures to be trade-friendly, India must respect the certificates issued by the exporting country.  Only in exceptional cases, where there is reason to doubt the origin, based on credible information, the second scrutiny should be carried out.  The inquiries can be focused on certain products or certain regions, from where misuse has been noticed or there is a high possibility of diversion of non-originating goods. 

There is little evidence of diversion of non-originating goods from countries like Japan and Korea.  Subjecting all imports under the FTAs to the same level of scrutiny will hamper the ability of importers to claim concessional rates of duty available to them under the FTAs. The spirit of co-operation which led to these Agreements should not be lost sight of.