Govt sensitises industry as India set to implement rules of origin norms for imports from Sept 21

In the Union Budget 2020, government amended the custom law and issued new rules last month to curb the misuse of customs duty concessions under FTAs. The domestic industry has been urging government to take strict action to curb such irregular imports done by flouting FTA provisions.

Sources privy to the developments told CNBC-TV18 that the new rules require the importer to take reasonable care to satisfy that the goods being imported and claiming FTA benefits meet the 35 percent value addition in the country of export clause.

"It will be the responsibility of importers to ensure that the goods being imported by them should have been only manufactured or produced on the foreign countries but also minimum 35 percent value addition have taken place in those countries," sources said.

"According to the new rules, importers will have to have all proofs and on being asked by the Customs Department, importer shall have to produce proofs to justify 35 percent value addition. Mere a certificate by the exporters would not suffice. If importers are not able to satisfy the Customs Department, then FTA benefits would be denied," sources added.

Union finance ministry sources claimed that the ASEAN FTA allows imports of most of the items at nil or concessional basic customs duty rate from the 10 ASEAN member countries. Here, major imports to India are coming from 5 ASEAN countries namely Indonesia, Malaysia, Thailand, Singapore and Vietnam.

Meanwhile, it's important to note that if goods are originating from China and routed through other ASEAN countries, then the goods will not be eligible for customs duty concessions under ASEAN FTA.

"The country of origin is determined by application of certain set of conditions as prescribed in the FTA agreement itself. In respect of goods, other than natural products native to these countries, the required condition is that a value addition of at least 35 percent of the export value of goods must have been contributed by the ASEAN member country," sources said.

"In addition, the goods should undergo some appreciable transformation (as prescribed for product separately in the FTA by way of product specific criterion)," sources in the know told CNBC-TV18.

For example, if a mobile is exported from Indonesia to India, then it would qualify of being Indonesian origin only if such mobile is made significantly in Indonesia and 35 percent of its FoB value is contributed by Indonesia.

It may be noted that at present, a country of origin certificate, issued by notified agency in the country of export, is produced by the importer and there is no additional obligation on importer to satisfy him of origin of goods even though he claims substantial benefit.

According to union finance ministry sources said that investigation into FTA imports in last few years has revealed that the rules of origin, under respective FTAs, were not being followed in the true spirit.

In a number of cases, it was discovered that items from non-ASEAN countries were being diverted into India through ASEAN countries with mere packing/repacking, assembly or some minor processes and declaring 35 percent value addition or wrongly claiming significant transformation in ASEAN member country.

"The practice has been rampant in electronic items like mobile phones, televisions, set-top boxes, air conditioners, electronic parts and telecom equipment. The FTA partner countries have been exporting these goods without having the necessary technological capacity to achieve required value addition.

Moreover, rules of origin were flouted even in products like aggarbatti, arecanut, black pepper, etc. The Certificates of Origin were joyously issued by the agencies in the country of exports without any accountability and if verification is initiated, these agencies either do not respond or responding casually," sources in the know of the matter said.

Meanwhile, union finance ministry sources said procedure is going to change significantly when new rules come into play. The new rules specify the methodology for claiming rules of origin by an importer, cast obligation on him to satisfy correctness of what he is claiming.

"At the outset, these rules require an importer to make a self-declaration in the bill of entry that the goods qualify as originating goods for preferential rate of duty under that agreement. He should produce certificate of origin covering each item on which preferential rate of duty is claimed. Importer is also required to provide relevant details such as country of origin certificate reference number, date of issuance of certificate of origin, originating criteria, etc," said a government official.

Stating that the new rules would not only meet the long-standing demand of the domestic industry but would also effectively curb the misuse of FTAs.

Another official said, "The rules now allow the customs to reject the claim of country of origin if certain discrepancies are observed in the claim so made. The importers are required to take due care while claiming country of origin for the FTA benefit. He must possess information to demonstrate the manner in which country of origin criteria, including the value content and product specific criteria, specified in the Rules of Origin, are satisfied, and submit the same to the customs on demand."

According to new rules, now the customs officer shall either within 15 days accept the information furnished by the information (if he is satisfied) or may initiate further verification from the exporting country. If no verification report is received from the agency in the exporting country within the prescribed time, the preferential treatment to goods under FTA would be denied.

Union finance ministry sources said that to ensure that FTA benefit is not misused, the rules provide for temporary denial of preferential treatment to goods where further verification has been initiated. In such cases, the importer shall have either to deposit full duty or furnish bank guarantee/security equal to the benefit claimed in terms of duty concession.

Also, if it's found that benefit has been wrongly availed in respect of a consignment, the FTA benefit would be denied in subsequent consignments of identical goods (in terms of country of exports and exporter, etc.) and importer shall have to pay full applicable duty. In such cases where sufficient information is available, that FTA benefit is not admissible, the benefit may be denied without causing further verification.

With new mechanism coming into force on September 21, the FTA imports, particularly of electronic items, refrigerators, air-conditioners , cameras, mobiles and telecom equipments, set-top boxes, parts like head phones, camera modules, aggarbatti, and other items in which rampant misuse is likely, would be under the lens. Importers claiming FTA benefit be prepared for the strict scrutiny by customs.

Abhishek Jain, tax partner, EY said, "With effect from September 21, 2020, businesses availing benefits of FTA would be required to comply with the revised bill of entry format declaring additional particulars in relation to FTA benefits, and will be required to upload the Copy of Certificate of Origin on Customs portal. While the intent of the government is clearly to curb wrongful availment of concessional customs duty by routing the exports to India through preferential trade countries, practically, compliance even by genuine importer at short notice seems challenging."