The origin of goods is relevant when importing them under a particular Free Trade Agreement (“FTA”). Accordingly, all FTAs provide for origin criteria and means to determine the country of origin of goods. Such rules of origin (“RoO”) are legislated in India by way of a notification issued in terms of Section 5 of the Customs Tariff Act, 1975. These rules determine the origin of imported goods on which exemption benefit is availed by the importer. These rules replicate the RoO provided under the specific FTA.

To comply with the origin requirements under these rules, the supplier of goods (in the county of export) is required to provide the importer with a Certificate of Origin (‘CoO’) from the issuing authority in the country of origin which validates the origin of the goods under import.

However, one of the biggest challenges for governments of importing countries in recent times has been to ensure that the importers do not adopt fraudulent means to claim exemption benefit based on RoO. To address this challenge, the Government of India, in 2020, introduced the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (“CAROTAR”) to strengthen the origin verification mechanism.

The RoO in the recently negotiated FTAs are detailed and streamlined as compared to the earlier FTAs. Earlier FTAs discussed the origin criteria, calculation of local value content, and operational certification & verification procedures for administrative purposes. In comparison, the new generation FTAs (for e.g., India’s FTAs with Australia and the UAE) are a step ahead as the rules of origin contained therein also properly chalk out the procedure in relation to initiation of verification, and instances of denial, temporary suspension, & prospective restoration of preferential tariff.

Unlike the earlier FTAs, the new generation FTAs also list specific obligations of the exporter/supplier. This mirrors the intent of the participating governments to provide the preferential treatment only in genuine cases where the CoO is valid, and the goods have satisfied the origin criteria and to take care of the ingenuine instances of the importers illicitly seeking preferential treatment on imports.

In India, until 2020, the importers only had to produce a valid CoO from the issuing authority of the originating country to claim tariff benefits under a particular FTA. The CoO is obtained by the exporter from the issuing authority in the country of origin/export. The courts till now had held that once the CoO is produced by the importer, the authorities cannot question the origin criteria since CoO was the conclusive evidence of origin. CC v. New Bombay Exports

However, vide the Finance Act, 2020, Section 28DA was inserted into the Customs Act, 1962 to provide for a procedure to claim preferential duty on import of originating goods under an FTA, verification by the proper officer and circumstances for rejection of the claim. Section 28DA casts certain obligations on importer to possess ‘sufficient information’ regarding the origin criteria as per notified rules and show ‘reasonable care’ before claiming the country-of-origin benefit. This information required to be possessed by the importer is to be obtained from the supplier/ manufacturer of the goods. To effectuate Section 28DA, the Central Government introduced Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (‘CAROTAR’) vide Notification No. 81/2020-Cus (N.T.) dated 21.08.2020.

Readers may be familiar with how banks and IT Companies require the customer to use 2 Factor Authentication ("2FA") besides entering their password, seemingly to ensure online account security. Similarly, CAROTAR legislated by the Central Government is the Customs Authority’s own 2FA mechanism i.e., a two-step verification process to ensure that trade benefit is only available in genuine cases where the goods meet the origin criteria.

The Government has devised these rules as an additional layer of scrutiny to prevent an importer from obtaining benefits on account of ingenuine certificates, non-satisfaction of origin criteria, etc.  Thus, to be able to avail benefit under any trade agreement, the importer will mandatorily be subject to scrutiny under CAROTAR.

From the simultaneous reading of the provisions of CAROTAR and the rules of origin of the new generation FTAs, one can observe that the provisions in relation to initiation of verification, procedure governing such verification of CoO, and instances of denial, temporary suspension, & prospective restoration of preferential tariff are similarly structured. To highlight the similarity in the structure of CAROTAR and new generation FTAs, a quick reference is made to some of the provisions of CAROTAR, India – UAE CEPA, and India - Australia ECTA on sample basis.

The developments vide CAROTAR and their reflection in new generation FTAs echoes the intention of the government to allow preferential benefit only to genuine importers. Subsequent to the introduction of the CAROTAR, the government has ensured synchrony in the corresponding RoO provisions of new generation FTAs with the CAROTAR.

This will streamline the roles and obligations of the parties involved in the transaction and the customs bodies of the participating nations. Further, it will lessen the chances of misuse of preferential tariff benefits and consequently, undue revenue leakage.

V Lakshmikumaran is the Founder & Managing Partner Lakshmikumaran and Sridharan (LKS).