The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020), has come into force from 21st September 2020. It was notified on 21st August 2020. The new rules will make the importer to correctly ascertain the country of origin, properly claim the concessional duty and assist customs authorities in the smooth clearance of legitimate imports under FTAs.
Rules of Origin
These are the criteria prescribed to determine the national origin of an imported product in a country. These are mainly used:
- To implement measures and instruments of commercial policy such as anti-dumping duties and safeguard measures;
- To determine whether imported products shall receive Most-Favored-Nation (MFN) treatment or preferential treatment;
- For the purpose of trade statistics;
- For the application of labeling and marking requirements; and
- For government procurement.
Types of Rules of Origin:
- Non-preferential rules of origin: These apply in the absence of any trade preference, where certain trade policy measures such as quotas, anti-dumping, or "Made in" labels may require a determination of origin.
- Preferential rules of origin: These apply in reciprocal trade preferences (i.e. regional trade agreements or customs unions) or in non-reciprocal trade preferences (i.e. preferences in favor of developing countries or least-developed countries (LDCs)). Preferential rules of origin are more restrictive than non-preferential ones. Each trade agreement has its own set of Rules of Origin that is agreed upon by involved nations, which includes guidelines for issuing a legitimate Certificate of Origin (CO).
Certificate of Origin (CO)
A CO is an important international trade document that certifies that goods in a particular export shipment are wholly obtained, produced, manufactured, or processed in a particular country. They declare the nationality and content of the product and also serve as a declaration by the exporter to satisfy customs or trade requirements. An exporter has to submit a CO at the landing port of the importing country.
Criteria commonly used to determine the country of origin of goods:
- Wholly obtained criterion: These include goods produced or obtained in a given country without the incorporation of any input material from other countries.
- Substantial/sufficient transformation criterion: In this, goods are required to undergo a substantial transformation in a country for the good to be qualified as originating.
- De minimis/tolerance rule: It permits a specific share of the value or volume of the final product to be non-originating without the final product losing its originating status.
Significance of Rule of Origin
- Addressing trade-distorting practices: Determination of product origin is essential to implement trade policy measures in a country for purposes like correcting "unfair trade". For example, the imposition of anti-dumping or countervailing duties against imported products causing material injury to the domestic industry.
- Protecting local industry: Safeguard measures to protect against an unforeseen increase of imported products causing serious injury to a specific domestic industry.
- Ensuring the effectiveness of Trade Agreements: Stringent rules of origin can check the wrongful practice of availing concessional customs duty by routing exports to India through preferential trade countries.
- Transparency in customs procedures: Rules of origin make it clear for the businesses in India and abroad to know the exact procedures that would be adopted for custom clearance.
- Implementing environmental or sanitary measures: For e.g. preventing the import of contaminated foodstuff or plants from a specific country or import of nuclear and hazardous material and their waste.
- Administering "buy national" policies: For adjusting the balance of payment with specific countries.
- Ensuring national security or political policy: by controlling trade in strategic weapons or specific products to which sanctions are applied.
Free Trade Agreement
A free trade agreement (FTA) is a treaty between two or more countries to facilitate trade and eliminate trade barriers. It aims at eliminating tariffs completely from day one or over a certain number of years. Free trade agreements help create an open and competitive international marketplace.
Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020)
These rules are applicable to the import of goods into India where the importer makes a claim of a preferential rate of duty in terms of a trade agreement (TA). CAROTAR, 2020 aims to supplement the operational certification procedures related to the implementation of the Rules of Origin, as prescribed under the respective TAs of India viz. Free Trade Agreement (FTA), Preferential Trade Agreement (PTA), Comprehensive Economic Cooperation Agreement (CECA), Comprehensive Economic Partnership Agreement (CEPA), etc.
Key Provisions are :
- To claim preferential rate of duty under a TA, the importer, at the time of filing bill of entry, has to make a declaration in the bill that the imported products qualify as originating goods for a preferential rate of duty under that agreement and produce a certificate of origin.
- The claim of a preferential rate of duty may be denied by the proper officer without verification if the CO-
- is incomplete or
- has any alteration not authenticated by issuing authority or
- has expired
- The importer also has to submit all relevant information related to the country of origin criteria, including the regional value content.
- An officer may, during the course of customs clearance or thereafter, request for verification of CO from verification authority where there is a doubt regarding genuineness or authenticity of the certificate.
Why need CAROTAR
- CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
- India has inked FTAs with several countries, including Japan, South Korea, and ASEAN members.
- Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
- The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.
Three cases regarding Rules of origin:
- Goods totally produced/manufactured in ASEAN: "Certificate of Origin" will mention that goods originated from ASEAN and they will get preferential/zero duty.
- Inputs purchased from China, value addition happened in ASEAN and then goods are reaching into India: Goods will be considered originating from ASEAN if the value addition in China is less than 60%.
- Some value addition happened in ASEAN, then goods/inputs purchased by China and then entering into India: It will always be treated as goods originating from China and they will not get benefits under ASEAN FTA.
The rules of origin enable the preferential agreements to be correctly implemented, which promotes the development of trade and encourages investment. Measures that can ensure their productive use include:
- Clearly defined terms and procedures, where any changes are published promptly.
- Ensuring that they do not create restrictive, distorting, or disruptive effects on international trade and do not require the fulfillment of conditions not related to manufacturing or processing of the product in question.
- Administering the rules in a consistent, uniform, impartial, and reasonable manner.
- Facilitating review of any administrative action in relation to the determination of origin by judicial, arbitral, or administrative tribunals.
- Non-disclosure of confidential information without the specific permission of the person providing such information.