Several of India's trade partners in the Asia-Pacific region have raised concerns about new rules of origin requirements imposed by the country, which they claim are increasing the burdens on importing goods and harming overall trade.
Multiple nations, including Japan, South Korea, Indonesia, Malaysia and Sri Lanka, have flagged up new non-tariff barriers imposed as a result of the changes, which went into force last year and seek to provide more detail on the sources of items entering the country.
However, trade partners that have free trade agreements (FTAs) with India have argued that the new rules, known as Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, or CAROTAR, are too onerous. So what do the changes involve, and what impact is this new environment having on importers to India?
What are the new CAROTAR rules?
The CAROTAR rules were implemented in September 2020 following an amendment to India's 1962 Customs Act. They allow the country's finance ministry to require additional documentation from importers in addition to the usual certificate of origin (COO) paperwork if they are to claim tariff benefits offered by FTAs.
PwC noted that this has shifted many of the customs compliance burdens from exporters to importers, who are now required to obtain various pieces of documentation from their vendors, to be submitted at the point of importation.
This means that businesses importing goods to India under an FTA are now fully responsible for the accuracy of information on COOs, compliance with value added requirements and access to cost data.
Importers need to make specified declarations that their goods meet rules of origin requirements, as well as the particulars of any exemptions being claimed and information such as reference numbers, date of issuance and originating criteria.
Minimum information to be reported include details of the production process in the country of origin and the manner in which this origin criteria has been determined, the nature of the export and the treatment of any packing materials.
In cases where the origin information declared in a COO is doubtful, customs officers will be able to demand relevant origin details from the importer before seeking verification from the partner country.
"Failure to comply with these requirements could have an adverse impact in terms of supply chain disruption, denial of FTA benefits, penal consequences, and more," PwC wrote in a briefing note.
What have India's trading partners said?
All this has served to significantly increase the complexity of importing to India and raise barriers to trade, which were the primary concerns highlighted by India's partners in submissions to the World Trade Organization.
Livemint reports, for example, that Indonesia has expressed worries that the CAROTAR rules will make the verification and clearance process longer, which goes against the spirit of trade liberalization set out in the FTA between India and ASEAN nations.
"The request to provide business process information for importers would also pose a risk from unauthorized parties, such as information leakage issues under the CAROTAR scheme," Indonesia stated in its submission. "The stringent requirements will impact the importers, especially those who are legitimately claiming Preferential Tariff Treatment."
South Korea also suggested that the rules would increase the cost of applying preferential tariffs, thereby acting as an obstacle to the successful implementation of the FTA.
"Korean firms raise increasing concerns which include: an excessive demand for submission of origin-related information; retrospective applications of law; and arbitrary interpretation of the regulation by the customs authorities," the country stated in its objection to the rules.
It therefore called for India to take a critical look at the new regulations with a view to easing these burdens.
What does this mean for Indian importers?
Tax partner at EY India Abhishek Jain also told Livemint that while some delays have been seen as the result of the introduction of the CAROTAR rules, more companies are now streamlining the process of obtaining and collating the necessary data from their vendors, which should help ease any delays in future.
However, he added for now, most FTA shipments entering India are only being provisionally cleared by customs authorities, with more detailed scrutiny yet to come. This will require importers to engage with customs authorities to ensure they have all the necessary information and the checks can be completed as quickly as possible.
PwC also noted any firm importing goods to India while claiming benefits from FTAs must be prepared to provide documentation of regional value content under the applicable FTA.
To do this, it will certainly be helpful to have advanced customs management software solutions that can help them make sense of the new regulations and identify exactly what paperwork they will need.
