The last Union Budget had proposed a new provision in the Customs Act to regulate imports under Free Trade Agreements (FTAs). Finance Minister Nirmala Sitharaman in her speech laid the ground for "it has been observed that imports under FTAs are on the rise. Undue claims of FTA benefits have posed threat to the domestic industry. Such imports require stringent checks."

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Part B of the speech explained this further – "a new Chapter VAA (a new section 28DA) is being incorporated in the Customs Act to provide enabling provision for administering the preferential tariff treatment regime under Trade Agreements."

This provision is today part of the Customs Act. Subsequently, the Customs (Administration of Rules of Origin under Trade Agreements) Rules 2020 were notified (with a very inelegant acronym CAROTAR). Detailed guidelines were also issued indicating the date of CAROTAR coming into force as 21st September 2020.

FTAs are agreements between two or more parties to eliminate or reduce tariffs and improve market access. Rules of Origin (RoO) are an integral part of an FTA. They are designed to ensure that concessions envisaged in these agreements are granted only to products originating in the jurisdiction of parties to the agreements. RoO in effect establish the nationality of the product. They are aimed at preventing trade deflection. All FTA imports have also to be accompanied with a certificate of origin issued by the appropriate authority.

RoO can be complex. From a most basic, in cases of goods wholly obtained from the partner country, to a requirement of 35 percent value addition with a change in the tariff classification, to product-specific rules, to concepts of accumulation/cumulation where multiple countries are part of an FTA.

India has sixteen trade agreements, with several others at various stages of negotiations. While there has been an increase in imports as a result of the FTAs (the Receipt Budget 2020-2021 indicated the revenue impact from such trade agreements in 2018-19 to be Rs 48,793 crores, with the amount projected to increase to Rs 65,734 in 2019-2020), there has been no corresponding increase in exports.

Several cases of misuse of FTA benefits have been detected - gold jewellery, flat-panel TVs, beetle nuts, black pepper, cocoa powder amongst others, being instances of such misuse. In these cases, the Customs Department has had to encounter legal challenges. The courts have held that the department cannot go beyond the certificate of origin though investigations have suggested that the certificate has not been issued correctly. And this despite the fact that the customs notifications which permit such preferential duty imports, also empower the customs authorities to deny the benefit sought in the event of the imports not being in accordance with the rules. A need was felt to have statutory authority for dealing with such situations of misuse. Hence the new provision in the law.

It may be noted that Section 28DA merely brings into the statute and makes explicit, many of the provisions which are in the notifications issued to operationalise FTA’s. Thus provisions relating to the manner of issuance of certificate of origin, its presentation by the importing party claiming the benefit, the power to call for retroactive verification of the certificate issued, the power to suspend the benefit of preferential tariff treatment pending verification, are there in the extant notifications.

What CAROTAR seeks to do is to make the importer responsible for doing due diligence while sourcing goods from a free trade partner country. The importer would be expected to substantiate the claim of a preferential rate of duty with documentary proof. Timelines have been prescribed in the rules which should ensure that the interests of legitimate importers are protected.

A question can arise as to whether these new measures are necessary when detections to the tune of only about Rs 1500 crore has been made. This is a specious argument. Plugging loopholes and strengthening the hands of Customs to prevent misuse, can never be a cause of concern for legitimate trade.

There is a need also to review all FTAs. A cost-benefit analysis has to be done. The concerns of exporters and domestic manufacturers are paramount. We need to understand why our exporters have not been able to take advantage of the FTAs; why they are not competitive. We need to understand the impact that preferential imports have on domestic manufacture.

The WTO rules do permit renegotiation; specifically, FTAs permit (for instance Article 9 of the India -Asean FTA) any party, through negotiations and agreement with the other party, to modify or withdraw concessions made; similarly, FTAs permit initiation of safeguard measures in case imports are in such increased quantities so as to cause serious injury to the domestic industry of the importing party.

Liberalization through free trade agreements has an impact on trade flows. Depending on how rules of origin are thereafter implemented, they may promote or restrict trade. If the implementation of the rules of origin is more restrictive than is necessary, they may have protectionist effects and end up acting as trade barriers. Hence Customs should implement CAROTAR with a light touch - never forgetting they are meant only to prevent unscrupulous trade and not throttle legitimate trade.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

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