Preferential tariffs come under further scrutiny

By Shampa Bhattacharya, Kochhar & Co
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During the past decade, there has been a significant increase in the import of goods, much of which has been as the result of free-trade agreements (FTA). Under such agreements, trading partners significantly reduce or eliminate import duties on a range of goods traded between them. Goods imported under an FTA enjoy preferential tariffs if they fulfil the conditions relating to the origin of goods as set out in the rules of origin (ROO). ROOs are agreed between countries that are parties to preferential trade agreements, such as FTAs. ROOs specify criteria for determining the national origin of products. Countries that offer zero or reduced duty on imports from trade partners often set out in ROOs the eligibility of products to receive such preferential access. The justification for these ROOs is to prevent trade deflection. The role of ROOs is to ensure that only goods originating in the participating countries enjoy tariff or other preferences.

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Shampa Bhattacharya
Partner
Kochhar & Co

It is relatively easy to establish the origin of an imported product when it is produced in a single stage or is wholly produced or obtained in the partner country. In other cases where goods are not wholly produced or obtained, the ROOs define how it can be determined that a particular product has undergone sufficient work or processing, or has been subject to substantial transformation within the territory of the free-trade partner, and not that it has merely been trans-shipped from a non-qualifying country or has been subject to minimal processing.

In light of the above, a country that has entered into an FTA with India cannot dump goods from a third country into the market by just affixing a label on them. It has to undertake a prescribed value addition to those products prior to their export. ROOs help to prevent the dumping of goods.

False or misleading claims of FTA benefits have posed a threat to the domestic industry and such imports definitely require stringent checks. Lax implementation of ROOs has been a matter of grave concern for some time. The decline of manufacturing in India coupled with misuse and false claims of treaty benefits on imports from non-FTA countries has led the government to revisit the issue.

To control and monitor imports where the benefits of an FTA are being falsely claimed, new governing rules, Administration of Rules of Origin, are proposed to be introduced in this year’s Union Budget. The new rules will implement a scheme for verifying the country of origin of goods imported under FTAs with different countries. Specific provisions are proposed that would require importers to submit additional information or document verification from the authority issuing a certificate of origin, if it is found to be non-satisfactory.

The purpose of the proposed amendments is to impose stringent obligations on the importers to abide by the ROOs. Such strict monitoring places responsibility on both the importer and the exporter to ensure that they have complied with the additional requirements for claiming preferential duty rates. An importer would have to possess sufficient information relating to determination criteria such as regional value content, and product specific matters, as stipulated in the relevant FTAs. Both the importer and the exporter need to exercise reasonable care as to the accuracy and truthfulness of the information, which could be demanded for any period within five years from the date of claiming the duty benefit. Stringent penalties such as the temporary suspension of preferential treatment, the deposit of security or payment of the difference in duty for the release of goods can be imposed during the verification stage. In the event of any defective, non-authenticated or expired certificate of origin, the preferential tariff could be refused. The preferential tariffs could be withdrawn with the certificate of origin being regarded as inapplicable. This would lead to grave consequences, including the levying of fines and penalties, and the confiscation of goods.

Although the authority to screen the certificates of origin stems from country specific regulations, there are at present significant gaps in the adoption and implementation of corrective measures. The new rules will confer wider powers on the customs authorities to prevent misuse of preferential duties. It remains to be seen how these provisions are implemented, but it may be that claiming and retaining existing preferential treatment will be challenging. India’s trading partners may raise concerns about the proposed additional import rules under various FTAs, including the Comprehensive Partnership Agreement with Japan, Korea and other ASEAN countries.

To comply with the changes, importers should examine closely the documentation they receive from exporters in support of new claims and the continuance of existing benefits under FTAs.

Shampa Bhattacharya is a partner at Kochhar & Co.

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