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Tightening the Ropes on Administration of Preferential Tariff Treatment under Trade Agreements
Mr. Jignesh Ghelani (Partner, Economic Law Practice)
Ms. Sanchita Rungta (Senior Associate)
One of the prominent themes of the Union Budget 2020-21 was to introduce measures to bolster economic development by way of corruption-free, policy driven, good governance and to give an impetus to the domestic manufacturing industry.[1] To this end, the Government has proposed various changes, including the introduction of enabling provisions, under the Customs Act, 1962 (‘Customs Act’), for stringent administration of preferential tariff benefits (granted in line with trade agreements with various nations).
Setting the Context
In order to give effect to the bilateral/multilateral trade agreements between India and Member States, the Government of India has notified various Customs Notifications, which provides for concessional rates of duties on specified goods, when importing from Member States. In consonance with corresponding trade agreements, Rules of Origin have been put in place requiring the importer to prove that the goods originated in the Member State in order to be eligible for the concessional tariff. A common thread between these rules is that the goods are required to have Minimum Regional Value Content (RVC) of 30% - 35% to qualify as deemed to be originating in a particular Member State. A validation of the same is by issuance of a Certificate of Origin (COO) by the concerned authority of the exporting state.
Existing Mechanism
Under the existing provisions, the COO submitted by importers is considered as sufficient proof of the origin of the goods. In cases where the authenticity or accuracy of the COO is in question, the Customs can request the issuing the authority of the exporting country to perform a retroactive check. In cases where the Customs authority is not satisfied with such retroactive checks, in exceptional circumstances, it can perform a verification visit of the producer’s or exporter’s premise, as per the manner prescribed under such rules.
...In light of the above, it is seen that the burden of verification of the COO is primarily that of the Customs authority. Resultantly, there is an ease of doing business by the importers, as they are not being burdened with additional compliances.
Proposed Mechanism
The freedom granted to the importers have led to undue claims of preferential tariff treatment and have posed a threat to domestic industry, which has also been highlighted by the Hon’ble Finance in her Budget Speech.[3] In order to protect the interests of the domestic industry and to plug the leak owing to such undue claims, the Government has proposed to introduce Section 28DA under Chapter VAA of the Customs Act. The proposed amendment is summarised below:
Responsibility of the Importer |
Powers granted to the Proper Officer |
*Make a declaration that the goods qualify as originating goods *Required to possess and furnish information as regards to the manner in which country of origin criteria is satisfied *Exercise reasonable care with regard to the accuracy and truthfulness of the information provided *Mere issuance of COO would not absolve importer of the responsibility to exercise reasonable care as to the information furnished |
*Temporarily suspend the preferential tariff treatment, pending further verification. |
Importer allowed to release the goods on furnishing the security equal to the duty saved, or deposit the differential customs duty amount
*Disallow the claim for preferential tariff treatment, without further verification based on the available information
*Where verification proceedings establish non-compliance of the country of origin criteria, power to the preferential tariff treatment to imports of identical goods from the same producer/exporter, unless, information is furnished to the contrary
Observations and Way Forward
As per existing provisions, the COO is considered as the conclusive evidence of the RVC of the imported goods, unless evidence to the contrary is available with the Customs authority leading to initiation of retroactive checks.
In the past, Courts in India have consistently struck down any arbitrary action on the part of the Customs authorities often upholding the authenticity of the COO in absence of substantive material. The following position has been consistently upheld by the courts:
- The Customs authority cannot go behind the COO to deny the exemption;
- COO cannot be questioned basis assumptions/ presumptions;
- A certificate given by exporting state cannot be scuttled by the Customs authorities;
- The Rules of Origin is a self-contained code, and the Department is a creature of statute. The Department therefore cannot act in a manner contrary to what is provided for in the underlying statute;
- Due process for verification should be followed and the responsibility of the importer is limited to submission of COO and directing the importer to produce evidence in support of the same is beyond the mandate of the Rules of Origin.
It is also noteworthy that great sanctity is awarded to a COO even under the General Agreement on Tariffs and Trade (GATT), Article VIII 1(c) of which emphasizes on the fact that the contracting parties are required to minimize the incidence and complexity of import and export formalities.
...Further, Interpretative Note 2 to this Article states that it would be consistent if, on the importation of products from the territory of a contracting party into the territory of another, the production of COO should only be required.
The proposed amendment not only seeks to alter the position adopted by various Courts but also sidesteps the International standards issued with regard to administration of preferential treatment. It also marks a paradigm shift in the approach of the authorities, wherein COO will now no longer absolve the importer from his liability to substantiate the compliance of the Rules of Origin. The burden of establishing the authenticity and truthfulness of the information provided with regard to the origin of the goods will now be on the importer, leading to increase in the compliance burden as well as accountability of the importer. While the proposed amendments give additional power to the Customs Authorities to question the genuineness of the COO produced by the importer, the same may also result in denial of the benefits/concessions in an arbitrary manner and on the basis of assumptions and presumptions.
The introduction of Chapter VAA of the Customs Act is definitely a bold move to alter the well-established and accepted procedure of administrating and granting preferential tariff benefits. By virtue of tightening the ropes on the administration of free-trade agreements, the proposed provisions have sought to cast a far greater burden of proving the origin of the goods on the importer than before. While the actual implementation of the said provisions is yet to be seen, it will be imperative for importers who are regularly engaged in importing goods (and who avail such concessions) to start putting in place a mechanism to collate the required information/ back up documents to substantiate the information declared in the COO.
...It will also necessitate a relook at the contractual obligations or recourse available qua the agreement with the exporter or producer of goods, in cases where the benefit of preferential tariff treatment has been disallowed.
Importers can no longer rely on certainty of being granted tariff concessions under the preferential trade agreements basis the COO. It is important to have a relook at the benefits obtained by importers and adopt necessary precautionary measures as the same will be reviewed critically by the Custom authorities in the near future.
With contributions also from Rishi Raju, Associate, ELP