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Budget 2020: Customs Act Amendments Diluting Free-Trade Commitments?

Budget 2020 makes a unilateral change that is contrary to the ‘good faith’ principle which guides international treaties.

A freight ship arrives at a container terminal. (Photographer: Simon Dawson/Bloomberg)
A freight ship arrives at a container terminal. (Photographer: Simon Dawson/Bloomberg)

Every idea has its own currency. The dwindling fortune of free trade agreements as drivers of the economy, not just in India but globally as well, seems to be a quintessential illustration of this proposition. A certain amendment proposed in the customs law by the Finance Bill, 2020, has been portrayed as a death-knell of the FTA idea. In this article, we attempt to demystify the proposal, the events leading to it, and its implications.

The Setting For FTAs

The customs law specifically enables the Government of India to execute FTAs with other countries and regions and accord a ‘preferential’ import duty structure for the goods flowing in from the partner FTA countries.

The proposals in the Finance Bill, 2020 should be viewed in the context of two key developments.

First, the 2015 report of the Supreme Court-constituted Special Investigation Team on black money. In its report, the SIT had acknowledged that “trade-based money laundering through mispricing of imports/exports is a major means of taking money out of this country” and implored the Director-General of Revenue Intelligence to take steps to address “this menace”. The DRI also formally acknowledged that FTAs are “fraught with the possibility of misuse” and commenced closer scrutiny of the correctness of the FTA claims made by the Indian importers. For instance, investigations of cell-phone importers who were examined for misusing South Asian FTAs; or the August 2019 investigation against garment-importers claiming FTA benefit qua imports from Bangladesh; etc.

The immediate prompt for the Budget 2020 proposal could be due to the second development – litigation on the primacy of FTAs which principally relates to the country-of-origin certificates. These certificates, which are issued by the exporting country, carry a declaration that the exported goods satisfy the FTA requirements and are eligible for preferential duty claims.

In the case of ‘Purple Products’, the customs officer acted upon a DRI alert and required the importer claiming an FTA benefit to substantiate the COO certificate. The importer approached the Bombay High Court contending that the FTA carried detailed stipulations to determine the COO, and once the authorities of the exporting country issued the COO it was obligatory on the part of the Indian customs authorities to extend preferential rate under the FTA. In short, the jurisdiction of the customs officer was challenged before the High Court.

The Bombay High Court refused to address the challenge being of the opinion that such issues were within the prowess of the customs officer. Being aggrieved, the importer approached the Supreme Court, which disagreed with the High Court.

In the Supreme Court’s view, whether a customs officer could go behind the COO was indeed a legal issue which the High Court ought to have addressed.

In other words, the Supreme Court did not approve a blanket permit to the customs officer to challenge or ignore COO, perhaps in view of the overarching treaty-obligations of India in terms of the FTA.

Appraising The Proposed Change

It is in this background that the proposal in the Finance Bill, 2020 needs to be examined. In terms of its clause 108, an entire chapter is proposed to be inserted in the Customs Act [Chapter VAA] which exclusively deals with the COO certificates and seeks to arrest their uninterrupted application in India.

In what can be technically described as a situation of ‘treaty override’, the proposal installs a ‘procedure regarding claim of preferential rate of duty’ thereby empowering the customs officer not just to verify the correctness of the COO certificates, which were earlier ordinarily unimpeachable, but also deny the benefit of FTA in certain situations.

Dissected thus, the proposed amendment obliges the importer to “possess sufficient information” relating to the COO criteria and various other details. It is sought to be specifically stipulated in the law that “the fact that the importer has submitted a certificate of origin issued by an Issuing Authority shall not absolve the importer of the responsibility to exercise reasonable care” and such importer is obliged to furnish additional information sought by the customs officer, failing which the FTA benefit can be suspended.

The customs officer can thereafter seek information from the foreign counterpart to validate the FTA claim, and, in the situation of non-receipt or belated receipt of information, the claim would be rejected. The provision goes beyond to stipulate that the customs officer can unilaterally reject (i.e. without any obligation to verify from foreign counterpart) the FTA claim in certain circumstances, such as furnishing of incomplete particulars by the importer, incomplete COO, etc.

Assuming that the proposal will be accepted by the Parliament and enacted as law, the consequent dimensions of this proposal are manifold.

First and foremost, it renders the issue pending before the High Court—post remit by the Supreme Court—as academic, given that the customs officer now stands legislatively empowered to question and deny the FTA benefit.

Secondly, the provision departs from the FTA-delineated procedure to give effect to COO certificates and the mechanism required to be adopted for their verification.

This is a unilateral change of position which is contrary to the ‘good faith’ principle which guides the appreciation and application of international treaties.

Nonetheless, the new procedure must be unfailingly followed in India owing to the treaty override position which this provision effectively enacts. It may be a different case that FTA-partners may take up the attendant issues with the government at a diplomatic level. Nonetheless, but for a modification in the proposed provision, the Indian customs officers would continue to remain empowered to check and interrupt the FTA claims.

Thirdly, in pragmatic terms, most importers seeking to claim benefit of FTA would be forced to opt for provisional assessment at time of customs clearance of imported goods. To appreciate this dimension, one must note that the customs law follows the ‘self-assessment’ system wherein the importer assesses the goods at time of import and self-determines the applicable customs duty after factoring the applicable exemptions, including FTA entitlement.

Where the complete details are not available or in other situations such as where the importer cannot make a conclusive assessment of the customs-incidence, the law provides for provisional assessment. In such cases the right to make the determination vests with the customs officer. As can be expected,

  • provisional assessment implies that there is a delay in finally determining the availability of exemption, incidence of customs duties, etc.,
  • liability to pay interest arises, and,
  • additional procedures require to be complied, which is a usual in case of fiscal laws.

Furthermore, given that the proposal itself provides that the FTA benefit can remain suspended and imported goods can be provisionally released only on basis of solvent security, additional business costs can be expected to accrue to the importer invariably in every case where the FTA claim is suspected by the customs officer.

Fourthly, and most crucially, the most draconian is the last of the clauses in the proposed provision. It provides that where a verification establishes non-compliance of the COO criteria, the customs officer can summarily reject the preferential claim to the identically imported goods unless sufficient information is furnished to establish otherwise.

In other words, one black sheep can result into FTA disentitlement for the entire similarly-situated flock.

Concluding Thoughts

The proposed change can be summed up as a legislative injunction empowering customs officers to effectuate scrutiny of preferential duty claims qua an FTA.

While on one hand it prematurely settles the dispute in favour of the tax-department as regards their entitlement to question COO certificates, which lie at the heart of the FTA claim, on the other hand the amendment reverses movement towards trade-facilitation, which has been driving the recent digitalisation and relaxation of border-compliances.

This is a clear case of tax-evasion concerns diluting enforcement of tax-policy. Indeed there are evaders, who must be effectively addressed, but not at the expense of trade commitments and international obligations which underlie the very foundation of rule-based trading system of which India is a vociferous proponent.


Tarun Jain is Partner at BMR Legal, and the author of ‘Indian Customs (Wolters Kluwer India, 2019).’

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.