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Tax Insights
from India Tax & Regulatory Services
Government issues FAQs on rules administering origin compliance in free trade agreements
9 October 2020
In brief
To curb the rampant misuse of free trade agreements (FTAs), the Government of India (GoI) introduced section 28DA in the Customs Act, 1962, through section 110 of the Finance Act, 2020, effective from 27 March 2020.
Under this enactment, a key provision for monitoring the correct use of FTAs is implementing a legal onus on the importer of goods with respect to the declarations made on the Certificate of Origin (CoO), compliance with value-addition requirements by the overseas manufacturer in terms of Rules of Origin (RoO) notified for the FTAs, etc. The enactment further requires the importer to possess value-addition/ costing-related data for goods imported using an FTA from 27 March 2020. Simultaneously, it incorporates different types of
consequences, including a penalty for the inability to share requisite information with the Customs Authorities.
Pursuant to the aforesaid enactment, the GoI on 21 August 2020, notified1 the procedural and compliance requirements for importers, processes and timelines for verification by the Customs Authorities, etc., in the form of the Customs (Administration of Rules of Origin Under Trade Agreements) Rules, 2020 (CAROTAR, 2020).
This came into effect from 21 September 2020.
Basis inputs received in trade consultations and outreaches, the Central Board of Indirect Taxes and Customs has released a set of Frequently Asked Questions (FAQs)2 relating to CAROTAR, 2020. Below is a summary of the FAQs.
In detail
• The importer needs to possess basic minimum information prescribed under Form-I, relating to the
description of the production process undertaken in the country of origin, manner in which the origin criteria is determined, treatment of packing materials, etc. However, an importer is not required to submit Form-I when f iling the Bill of Entry (BoE). Although when Customs Authorities doubt the origin of the goods, they can seek details in terms of Form-I and documents from the importer.
• The details, as required in Form-I, focuses on process, and thus, if it is the same for identical shipments, and there is no change in the production process or manner of processing, then, the same set of
inf ormation can be used in f iling Form-I f or identical goods covered under multiple BoE.
• If the importer is unable to furnish complete information as per CAROTAR, 2020 requirements, import will be allowed with preferential claim. However, in such cases, the origin-related information will be sought by the Indian Customs from the verification authorities in the exporting country.
• If the exporter fails to furnish the required information, the Customs Authorities will initiate the verification process with the exporting country and suspend the preferential benefit. The goods will be allowed clearance provisionally against a bond and security. Subsequent claims will be verified and will not be f acilitated through the Risk Management System. Theref ore, an importer is expected to ensure, to the best of his abilities, that it possesses the required information prior to import.
• There is no requirement to mandatorily seek information on cost break-up or proprietary production process.
1 Notification No. 81/2020-Customs (NT) dated 21 August 2020
2 https://www.cbic.gov.in/resources//htdocs-cbec/customs/CarotarBrochure_8thOct2020.pdf
2 PwC Tax Insights
In relation to ‘components which constitute value addition’, there is no requirement to provide exact figures.
It is only necessary to disclose the description of major components taken into calculation of domestic value addition, e.g., material, labour, profit, etc.
• As the RoO includes the criteria that a non-originating good should have undergone the required
transf ormation, e.g., at the sub-tariff heading level, the importer is required to know how this was met, e.g., through the process of distillation/ assembly of components/ stamping/ cutting etc. Theref ore, the
production process can be recorded briefly, clearly incorporating how it meets the prescribed o riginating norms. Hence, there is no requirement of an elaborate explanation of the ‘production process’ with technical details.
• The CAROTAR, 2020 does not prescribe any specific standard for supporting documents. It could range f rom an email communication from the exporter, informing of various origin-related details, to photographs of the production site, demonstrating the process that a good undergoes in the exporting country.
• The pref erential tariff treatment cannot be denied on identical goods when it was denied for the previous consignment. Preferential tariff treatment can be denied without verification of origin because of non- compliance of procedures or conditions laid out in the FTA itself, such as expired validity period of CoO or incomplete CoO. In case of identical goods in subsequent cases, it can be denied if the RoO criteria as prescribed in the FTAs are not met.
• The obligation on the importer originates from domestic law and not from the trade agreements. However, the origin-related provisions of the trade agreements have been incorporated in the domestic law by notif ying the RoO of each FTA. Hence, in the event of a conflict, the provisions RoO notified for each FTA shall prevail to the extent of the conflict.
The takeaways
Companies currently availing benefit under FTAs or planning to use FTAs in the future need to assess value addition holistically and all other criteria set out in the RoO of the respective FTA under consideration read with requirements of CAROTAR, 2020. As the authorities will be seeking information/ documents as per CAROTAR, 2020 requirements to seek RoO compliance, any inability to comply with these requirements could potentially have an adverse impact on business in terms of disruption, denial of benefit , penal consequences, etc.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor.
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This document does not constitute professional advice. The information in this document has been obtained or derived from sou rces believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subjec t to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any resp onsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.
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