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Budget 2022 expectations: Ease compliance rules for FTA imports to avoid future litigations

Krishna Barad, Partner
Indirect Tax
Abhishek Singhania, Director
Indirect Tax

27 January 2022

Easing of Free Trade Agreement import rules in the upcoming budget could provide relief to the importer and avoid future litigations, making cross-border trade hassle-free

A Free Trade Agreement (FTA) is a treaty between countries to agree on certain obligations that affect cross-border trade. It makes trade between contracting countries as hassle-free as possible with specified duty exemptions to increase investment and trade flows within integrated economies. 

FTAs can construct the economic framework within which the businesses and governments can operate. A well-designed and comprehensive FTA can provide multiple benefits, including access to the global market, preferential tariffs, and new business opportunities. FTAs help overcome international trade barriers like tariff barriers, cultural barriers and non-tariff barriers created to safeguard domestic market/manufacturers. India has entered into multiple trade agreements and one unilateral DFTP (Duty-Free Tariff Preference).

FTAs provide duty concession/exemption on imports from contracting countries that are ‘made in’ the signatory member country. Each FTA carries its own ‘Rules of Origin’ (RoO) to prescribe criteria to be fulfilled for goods to attain ‘originating status’ in the exporting country. Originating criteria are generally based on domestic value addition and substantial transformation in manufacturing/processing.

In the Indian context, FTAs have influenced imports from contracting countries over the years with a startling reduction in duties and an increase in trade volumes. However, the Customs Department has noticed frequent misuse of benefits, mainly by misdeclaration of the country of origin, to avail duty benefits. These misuses have caused revenue losses and adversely affected the domestic industry. 

In her Budget speech last year, Union Finance Minister Ms. Nirmala Sitharaman stated “It has been observed that imports under FTAs are on the rise. Undue claims of FTA benefits have posed a threat to the domestic industry. Such imports require stringent checks.” Accordingly, Chapter VAA and section 28DA were inserted in the Customs Act, 1962 to obligate the importer to satisfy that the originating criteria on imports under FTAs have been met and to shift the onus of submitting additional information/documents required for establishing ROO criteria on the importer, besides the submission of a valid Certificate of Origin (CoO). It further verifies the origin from foreign authorities, temporary suspension of the benefit of preferential treatment to importers, and situations under which a claim can be denied or rejected a certificate. 

In terms of the above, Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR) has also been notified, whereby importers are required to provide certain additional information on the Bill of Entry (BoE) for imports under FTAs, inter alia originating criteria along with possession of sufficient information about the origin of goods, information about accumulation/cumulation as applied, whether a CoO is issued by a third country, etc. 

It is essential to understand that the FTAs are backed by treaties between two Countries that also govern RoO. CAROTAR has been introduced by India to monitor all FTAs. Since contracting countries are not a party to the CAROTAR, it may also be considered as a unilateral add-on to the FTAs as the imports under the FTAs would also require compliance with CAROTAR. 

Even though submission of any additional documents at the time of filing the BE is not mandatory, the conditions required to be met under CAROTAR are often unreasonable and impossible for importers to fulfil due to the complete dependency of information on the overseas exporter. Due to the confidentiality and cost sensitiveness, exporters may disregard the request for additional data/documents that may be required in terms of the CATOTAR, resulting in a denial of concessional customs duty. Further, a free hand to customs authorities may result in denial of the duty concession even if the goods have a suspected origin criteria or the documents are found incorrect or incomplete as per the evaluation of authorities, causing genuine hardship to importers.

Thus, the requirements under CAROTAR have been observed to be cumbersome and challenging to importers due to arbitrariness, even though such compliances may not have been envisaged in the FTA between the contracting counties. It is thus expected that the Government may reconsider the insertion of section 28DA and CAROTOR in the upcoming budget and effect suitable changes to provide relief to the importer and avoid future litigations. 

The Government may also consider electronic submission of the CoO, increasing time for re-assessment of BoE up to 3 years as allowed in the European Union and other Customs jurisdictions, other facilitations like exemption from submission of bank guarantee on FTA imports to AEO accredited importers, as the trade facilitation is in line with the idea of ‘ease of doing business.