1.
Background on Free Trade
Agreements (FTAs)
Free Trade Agreements (FTAs) are multilateral
international treaties which provide for reduced Exim tariffs to encourage
cross-border trade between signatory countries. FTAs function as
self-sufficient provisions of law, including rules of origin, in respect of the
matters governed by them.
The Finance Act, 2020 introduced certain key changes in
domestic law by introduction of Chapter VAA in the Customs Act, 1962 for
administration of rules of origin under FTAs.
This is in the backdrop of wide spread belief that most
of India’s FTAs with ASEAN and SAARC blocs are wrongfully utilized by exporters
in neighbouring, non-signatory countries to route products through signatory
nations with little to no value addition, so as to circumvent higher tariff
rates.
The changes to the statute are effective from 27.03.2020.
2.
Overview of Changes
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Chapter VAA is introduced in the
Customs Act, 1962 to provide for the procedure to claim and regulate
preferential rate of duty under any trade agreements. Section 28DA of the
Customs Act, 1962 imposes on the
importer a responsibility to exercise reasonable care as regards the country of
origin criteria, notwithstanding the submission of a certificate of origin.
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The Customs officer may requisition necessary information in
respect of the import goods, their producer, country of origin, value
additions, etc. from the importer to verify the claim for preferential
tariff rates. Upon receipt thereof, the claim may be disallowed or further
investigated, as under.
-
The Customs officer is to be
granted powers to temporarily suspend
preferential tariff treatment to goods where he has reason to believe that
the country of origin criteria has not been met and undertake further
verification thereof under the trade agreement.
-
Upon such suspension, the goods may
be released by the officer subject to furnishing
of security amount equal to the difference between provisionally assessed duty
and preferential duty claimed or alternately, if so required by the
Commissioner, deposit such amount in the electronic cash ledger under section
51A.
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Thereafter, the Customs officer shall approach the Issuing
Authority for further clarifications from the Authority/exporter/producer
in respect of such claim, which may be ultimately allowed or denied on the
basis of the information received by the officer.
-
Any request for verification of the
claim by the officer must be sent within 5 years from the date of claim of
preferential rate of duty by the importer. Claim
for preferential rate of duty may be ultimately disallowed on the basis of
verification undertaken by the officer in respect of the goods in question or
identical goods from the same producer or exporter.
TBM Comments
-
The increased responsibility to ‘exercise reasonable care’ imposed on
the importer would operate over and above the requirement of merely furnishing
a Certificate of Origin. The manner of interpretation of this requirement in
practice remains to be seen.
-
The additional provisions made under Chapter VAA would exacerbate tedious
procedures already in place for claim of preferential tariff by importers.
Adequate risk management systems will have to be put into place to satisfy
customs officials regarding the ‘exercise of reasonable care’ by the importer.
This framework will inevitably raise the cost of compliance for importers
utilizing the FTAs.
-
Existing provisions for
verification of origin of goods under FTAs are enforceable in their own right
and creation of domestic law conflicting with such provisions would be
untenable and may be interpreted as
violative of the doctrines of ‘good faith’ and pacta sunt servanda under the Vienna Convention on the Law of
Treaties and under customary international treaty law at large. Although
domestic anti-abuse laws have been academically seen as an exception to this,
creating additional restrictions, which may defeat the attractiveness of
benefits under FTAs, may be viewed as a direct conflict with the object of free
trade espoused by the treaties. Nonetheless, such domestic laws have been
introduced in respect of various international treaty structures within other
sovereign jurisdictions.
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Furthermore, procedures for requisition of information by the proper officer from
either the importer or the Issuing Authority are to be provided by way of
rules, a function which is left to the
hands of the executive. Being concerned with international agreements
entered into by India, this could be arguably viewed as an excessive delegation
of power by amendment of the statute and may be open to challenge on this count.
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