India Frames Rules To Curb Duty Evasion, Misuse Of Trade Pacts

The new norms are a result of an amendment in the Customs Act earlier this year.

An employee walks past gantry cranes loading shipping containers onto trucks from the Cosco New York container ship docked at the Jawaharlal Nehru Port (Photographer Dhiraj Singh/Bloomberg)
An employee walks past gantry cranes loading shipping containers onto trucks from the Cosco New York container ship docked at the Jawaharlal Nehru Port (Photographer Dhiraj Singh/Bloomberg)

Increased documentation, additional disclosures and a longer information retention period—these are some of the effects of the new 'Rules of Origin' introduced to tighten the noose around importers who misuse free-trade agreements to dodge customs duty.

The new norms are a result of an amendment in the Customs Act earlier this year. They bring in two key changes. First, importers claiming preferential tariff must follow the revised procedure; and two, customs officers have been given wider powers to scrutinise origin of imported goods.

Experts pointed out that while the new rules may prevent treaty abuse, extensive compliance for importers may act as an impediment.

What’s Changed For Importers?

Broadly, imports can be classified into two categories—goods imported under a trade agreement or without it. Imports under a trade pact get the benefit of lesser or zero trade barriers, as well as a concessional tariff regime if goods originate from a partner country.

But these free-trade pacts have been misused by masquerading goods, originating from non-agreement countries, as imports under the free-trade agreements. For instance, an industrial body representing the stainless steel developers alleged last year that exporters from non-treaty countries were colluding with Indian importers to abuse the provisions of the Asean free-trade agreement.

To address this, customs officers can now ask for further details and documents to determine their origin and whether the imports can be subjected to a concessional duty.

Jigar Doshi, partner at Tax Technology Managed Services LLP, said the new rules indicate that a certificate of origin may no longer be taken at its face value. "While this signifies a push towards 'Atmanirbhar Bharat', it may come at the cost of causing hardships to genuine importers," he said.

Doshi explained that for import of goods produced wholly in a partner country, officers may demand documents substantiating the manufacturing or production process. For not wholly obtained goods, officers may seek documents which show substantial value addition in a partner country. In extreme cases, Indian customs authorities can directly request data from their foreign counterparts or seek notarised documents, he said.

New Rules Of Origin: Impact

The new rules may prompt importers to re-evaluate their existing logistical and operational strategies by factoring in the compliance requirements.

Logistical Strategy: Goods imported into India have to undergo an elaborate procedure before they are cleared to enter the domestic territory. The process involves production of a "bill of entry", appraisal and examination of imported goods and then payment of customs duty by the importer.

Companies either handle the process on their own or through an external agency depending on import volume and expertise. The new rules of origin may lead to importers building this capacity in-house, experts said.

A major impact will be seen on the logistical strategies of small and medium enterprises, Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., said.

So far, MSMEs have used an external customs and handling agent to address any queries as the department mainly relied on the certificate of origin and seldom ventured into fact finding. They will now need to assess their internal capabilities of handling queries and concerns relating to the originating criteria due to the new requirements.
Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co.

Vendor Due Diligence and Supply Chain: A key differentiating factor in the new compliance regime is that officers can suspend or deny preferential tariff benefits to an importer. This can be done if an officer has reason to doubt the origin of goods and the documents or information produced by an importer does not satisfactorily demonstrate that the imports meet the prescribed origin criteria.

An issue may arise when an importer receives a detailed query from the department. He may find it difficult to produce all the required information if it is not readily available, thus delaying the process. An importer will thus have to re-evaluate his supply chain strategies to address such exigencies.

The main challenge for importers will be to gather data from overseas suppliers in a time-bound manner as some of it may be sensitive and the suppliers may not be willing to share such information readily, Bose pointed out.

The new rules may compel companies to re-think their supply chain strategy, require them to evaluate the reputation of overseas suppliers, ease of obtaining additional information, look at alternate sourcing options and even re-negotiating commercial contracts with suppliers to build in monetary safeguards.
Rajat Bose, Partner, Shardul Amarchand Mangaldas Co.

Doshi said a major and direct impact of the strict provisions under the news rules of origin will be seen on the supply chain of industries in the electronics, fiber, yarn and allied sectors which mainly rely on capital goods and inputs which are imported under free-trade agreements from partner countries.

The rules become effective from Sep. 21.