A look at India’s rules of origin changes to the Customs Act
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

A look at India’s rules of origin changes to the Customs Act

Sponsored by

The PTA's approach is based on a trial and error method

Ritesh Kanodia and Meetika Baghel of Dhruva Advisors assess the guidelines concerning the implementation of section 28DA of the Customs Act, 1962 and CAROTAR, 2020 in respect of rules of origin under trade agreements.

The Indian government introduced a chapter in the Customs Act* in the Budget of 2020, which placed the onus on Indian importers to prove that goods imported under the free trade agreement (FTA) adhere to the prescribed origin criteria. Under the provisions, the tax authorities have greater powers that permit them to temporarily suspend the preferential treatment pending verification, or even disallow the claim under special circumstances without further verification. Claims can also be rejected for importers of identical goods, where at the time of previous verification, such goods imported by other Indian importers from the same producer and exporter have been found to be non-compliant with the prescribed conditions.

In pursuance to these provisions, the government has notified the Customs (Administration of Rules of Origin under Trade Agreement) Rules, 2020 (the rules[1]), which stipulate the detailed procedure to be followed for substantiating the benefits under the FTAs and the powers of verification of the authorities.

The rules require an importer to submit certain declarations in the bill of entry filed for goods imported under the FTA and requires it to be in possession of details prescribed in Form I. The details include information on the production process, originating criteria, the origin of inputs (used for manufacturing/producing imported goods), the method used for determining the origination criteria for example de minimis, accumulation/cumulation, value content, change in tariff classification (CTC) rule, process rule etc. The importer is supposed to exercise reasonable due diligence in the verification of data. The onus of accuracy and truthfulness of the information is on the importer.

The information sought is at a very high level and the rules lack guidance on the exact nature of the documents/proof that needs to be obtained to convince authorities on the genuineness of the claim by the Indian importer. Most of the information sought could be confidential or a process registered under an intellectual property, and the supplier may be completely unwilling to share it, e.g. production process or cost details or value content workings, etc. There exists past instances where the issuing authorities, from the member nations, have forbidden the exporters from sharing any details with the Indian importers, as such requests have been considered outside the four corners of the FTA. Confidentiality has also been cited as a reason for not sharing these details.

Even if the supplier were ready to submit the details, the rules do not stipulate the level of verification that needs to be carried out to constitute reasonable due diligence. What constitutes ‘reasonable due diligence’ can differ from one tax authority to another and this could lead to an unsystematic and indiscriminate approach to conducting and concluding enquiries by the customs authorities. There could also be a situation where additional documents are asked for at a subsequent stage, as the customs law permits notices to be issued for up to five years[2], and that stage the Indian importer may no longer have any ongoing transactions with the supplier. Thus, can it be argued that since the requisite information was submitted and duly verified, no demand can be raised alleging longer period of limitation?

The advent of the rules is also likely to witness a change in the commercial arrangement between the exporters and importers, where importers would demand a declaration from the exporter on the authenticity of the certificate of origin (CoO) and the documents provided for establishing the origin criteria. Some instances would also see the demand of indemnity to cover cases where the provisions of incorrect documents/details leads to denial of benefits and levy of penalties. Moreover, the above would then become a pre-condition of sale.

An alternative process of verification has also been established in instances where the importer fails to provide the requisite details or satisfy the authorities of the origin criteria. The authorities in such instances are directed to reach out to an appointed central authority, called the nodal officer, to ask for the verification of CoO from the issuing authority. A standard operating procedure has been prescribed for making a verification request. The FTA entered into with member nations also provides for a retroactive check. However, while such a verification is being conducted, the preferential treatment otherwise accorded to the importer is suspended and goods are cleared provisionally after obtaining 100% security against the duty recoverable or sought to be recovered, thereby making the process even more onerous for the Indian importers.

The CoO issued by the member country is generally accepted as a reasonable assurance that the goods are of the origin of the exporting country. Furthermore, the FTAs already prescribe a retroactive check, whereby the importing country government can reach out to the exporting country government and seek information.

As is apparent, there is clearly a need to evolve a better mechanism for data sharing and building trust for granting the benefit effectively to the Indian importer, and at the same time liberate the importers of the arduous task set-up for them. In the meanwhile, it very likely that the Indian importers could challenge validity of the new rules before the court of law.


* Section 28DA of the Customs Act 1962

[1] The Customs (Administration of Rules of Origin under Trade Agreement) Rules, 2020 (‘the Rules’) have been notified vide Notification No. 81/2020 Customs (N.T.), dated 21 August 2020, effective from 21 September 2020

[2] Under the Indian Customs law, demand notices can be issued up to one year if there is no fraud or suppression. However, if fraud or suppression is alleged, the demand notices can be issued up to five years i.e. longer period of limitation.

Ritesh Kanodia

T: +91 22 6108 1000

E: ritesh.kanodia@dhruvaadvisors.com

Meetika Baghel

T: +91 22 6108 1000

E: meetika.baghel@dhruvaadvisors.com

more across site & bottom lb ros

More from across our site

The 61-year-old has run the firm’s UK business since 2020
The report, which again demanded PwC release more information related to the scandal, “did not go far enough”, Australian Greens Senator Barbara Pocock told ITR
Resources needed to manage new compliance and financial reporting requirements will be significant, BDO also said
Interested parties may submit their comments on proposed bills and the subsidiary legislation by July 5
The Australian government has run roughshod over professional tax bodies with untested reporting obligations to please a mob baying for PwC’s blood, writes Tom Ravlic
Technical excellence is paramount for clients looking to hire new advisers, according to a survey of nearly 29,000 corporate counsel
The EU nation currently has a headline rate of 25%; in other news, DLA Piper and RSM UK have strengthened their tax teams
Labour's plans for closing the tax gap suggest that taxpayers may face an increasingly aggressive HMRC
Rosenberg, Siemens' New York-based chief tax counsel, tells ITR about Ben Affleck comparisons, welcoming challenges from US tax authorities and what makes tax cool
The settlement means the IRS will receive $200 million from the defunct crypto exchange’s bankruptcy, a fraction of the claim value
Gift this article