The Custom (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR) notified by Customs vide notification No. 81/2020 – Customs (N.T.) has caused much consternation in the importer community. These Rules (read with Section 28DA of the Customs Act and Customs circular No. 38/2020)seek to establish a framework for establishing the authenticity of any claim for preferential tariff treatment under any of the extant Free Trade Agreements and prevent the misuse of the same by either the importer or the exporter.

It is important to understand that all the FTAs have clearly defined Rules of Origin as well as the procedure for administering the same. The CAROTAR Rules are meant to provide a generic framework for preventing the misuse of Rules of Origin under various FTAs and act as a supplement to the same. In the event of a conflict between the CAROTAR Rules and the specific Rules of Origin, the latter shall prevail.

Why is the importer community clearly apprehensive about the implementation of these rules with effect from 21st of September’2020?

As things stand, all FTAs have their own Rules of Origin which are either in the form of generic rules (which are applicable to all product lines) or are in the nature of Product Specific Rules which are specific to certain tariff lines/products/product groups. Broadly, the Rules of Origin use the following criteria (either alone or in combination with each other):

  1. Value addition or Regional Value Content, normally expressed as a percentage of the FOB value with a minimum threshold prescribed for meeting the origin criteria
  2. Change in the tariff code between the input and output at the level of Chapter (CC), Chapter Tariff Heading (CTH) or Chapter Tariff Sub Heading (CTSH).
  3. The final product being exported should have undergone certain processing activities as laid down in the Rules.

While CAROTAR does nothing to alter the Rules of Origin under various FTAs, what it does is to place the onus on the importer of establishing the authenticity of the preferential tariff claim based on facts, data and documents. Hitherto, the importer only had to submit a preferential Certificate of Origin issued by the Verification Authorities of the exporting partner country and was in no way responsible for the authenticity of either the Certificate of Origin supplied by the exporter or the authenticity of the facts, data and documentation on the basis of which such Certificates of Origin were issued. Clearly the importers are wary of this additional burden and also possibly of the fact that it may be used as a means of harassment.

The Rules of Origin under various FTAs do provide for a verification framework in case the Custom Authorities of the importing member are not satisfied about the authenticity of either the Certificate of Origin or of the preferential tariff claim. CAROTAR also lays down a similar framework for verification and goes as far as to name a Nodal Authority i.e. Director, International Customs Division to whom all verification requests are to be forwarded by the proper officer of Customs. The Nodal Authority is solely empowered to take up the issue with the Verification Authorities of the exporting member.

However, CAROTAR is a marked departure from the existing rules insofar it makes it incumbent on the importer to maintain certain information in terms of Form I (of the Rules). The Form details all the information which form the basis of the preferential tariff claim and such information and underlying documentation has to be maintained for a period of at least 5 years from the date of import.

Votaries of free trade have labelled these rules as patently unfair and against the spirit of a liberal and seamless trading regime as envisaged in the FTAs. The claim is that the responsibilities placed on the importer are so onerous that importers will cease to use the FTAs and this will render them uncompetitive.

However, before arriving at any value judgement, it is imperative to examine the issue as dispassionately as possible. It is a fact that India’s experience with FTAs has not been on the desired lines and our trade deficit with our partner countries (especially ASEAN) has gone up manifold ever since these FTAs were signed. However, the reasons for that are not hard to fathom:

  1. Structural weaknesses in the way the FTAs were negotiated which resulted in India offering far more by way of tariff concessions as compared to partner countries.
  2. General lack of competitiveness of Indian exporters owing to various structural, internal and environmental factors.
  3. Low usage of the FTA by Indian exporters.
  4. Lack of holistic view in terms of the other components of the FTA as in investment, services, intellectual property and dispute resolution mechanisms.

It needs to be understood by one and all that CAROTAR is not a means to suppress imports under FTA and prevent revenue loss. What goes unreported in various sections of the media is the widespread misuse of the Rules of Origin under the FTAs in order to claim undue tariff benefits. This has happened across the spectrum ranging from metals like aluminium and stainless steel to electronic products like television sets and mobile handsets. Detailed investigation by the government has led to the uncovering of massive frauds involving manipulation of data and wrongful declarations in order to fulfil origin criteria. This has led to suspension of tariff concessions under the FTA besides action by Directorate of Revenue Intelligence against erring importers.

CAROTAR should be looked at as a response to such fraudulent practices rather than as a knee jerk reaction to the burgeoning trade deficit under various FTAs. To the votaries of free trade, my response is that trade should not only be free but fair as well. Any attempt to misuse the FTA goes against the spirit of fair trade.

Let us know examine the specific provisions to understand the implications of CAROTAR:

  1. Rule 3 (1) makes it obligatory for the importer to declare certain information on the Bill of Entry. A perusal of the data requirements clearly show that the data is clearly linked to the information contained in the Certificate of Origin or is available in the public domain e.g. the relevant custom notification for claiming tariff benefit. This is information which is normally available to any importer in the ordinary course of trade.
  2. Rule 3(2) defines specific circumstances where preferential tariff treatment may be denied without verifications. The grounds cited are so obvious and specific that nothing is left to the discretion of the proper officer of customs. As such, importers cannot claim unfair treatment on this ground.
  3. Rule 4 requires the importer to maintain the information as required by Form I along with the supporting documentation. It requires the importer to exercise “reasonable” care in ensuring the correctness or authenticity of the information. The term “reasonable” clearly implies that the importer is only expected to have such knowledge and exercise such caution as would be expected of one who is in that business.
  4. It goes without saying that the only recourse for the importer is to seek the relevant information (as required in Form I) from the exporter. The custom authorities should not attribute any fraudulent motives to the importer if the importer is able to prove that the information furnished by him/her as per Form I has been obtained from the exporter. The only exception to this could be a situation where the Custom authorities are able to prove beyond reasonable doubt that the importer knew that the information provided by the exporter was false or misleading or there was wilful suppression of facts.
  5. The onus placed on the importer for maintaining information regarding Form I for 5 years is indeed onerous but the same has to be seen in the context of the time limits laid down in Section 28. This is one area that probably needs a re-look.
  6. The information required in Form I is such that it would anyway have to be furnished by the exporter to the Verification Authority of the exporting country for proving the origin status of the goods. Hence, the exporter should not have any problem in sharing this information with the importer.
  7. Rule 5(1) makes it clear that the power to requisition information from the importer should only be used in those cases where the proper officer has reason to believe that the Origin criteria are not being met. It is therefore not a default condition. It is important for the authorities to ensure that the power under Rule 5 should only be used where the facts available make it apparent that the origin criteria are not being met and the same should not be used as a means to harass importers.
  8. Similarly the power bestowed on the Principal Commissioner/Commissioner under Rule 5 (5) (b) to reject a preferential tariff claim without verification should be used judiciously and that too when there is overwhelming evidence to that effect.
  9. Rule 6 lays down very clear criteria for sending verification requests to the verification authorities. This ensures that such matters do not become routine and this mechanism is resorted to only in genuine cases. Further, clear timelines are laid down for carrying out investigations and arriving at findings. The criteria for denial of preferential tariff requests at the end of the investigation process are also spelt out clearly so as to leave no room for ambiguity.
  10. The appurtenant customs circular also makes it clear that random verification should also be based on certain criteria with some examples clearly spelt out. This ensures that random verification is not used to harass innocent importers.
  11. The Rules also provide for provisional clearance which ensures that import consignments are not held up because of the verification proceedings.

A perusal of the rules makes it apparent that the system is not meant to harass importers but to apprehend those cases where duty is being evaded through fraudulent preferential tariff claims.

It is for the Custom authorities and the importer community to come together to make this new mechanism a success.