The role of customs as one of the pillars of international trade facilitator is rising rapidly in the global supply chain to keep pace with the ever-growing cross border trade. Where the direct tax collection has drastically declined, the share of indirect taxes, i.e. GST collections has shown an unexpected growth. In December, 2020 the indirect tax collection was at an all-time high, i.e. more than Rs.1,15,000 crore (approx.). Experts attribute that festive season and consequential revival of the economy due to relaxation of lockdown rules coupled with heightened vigilance by the revenue department against evasion as the major factors for this sudden rise in the GST collections.
It is pertinent to mention that despite the steep decline in merchandise imports, Customs collections, i.e. duty paid on imported goods have increased by 94% in December, 2020 to 16,157 crore as compared to December, 2019’s collection which was 8,300 crore. Finance Secretary Ajay Bhushan Pandey claims that this sudden buoyancy in Customs collection is due to many factors including the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (hereinafter “CAROTAR”) and the Faceless Assessment Programme.
Therefore, in this article, the author attempts to explain along with their effects, the CAROTAR and the Faceless Assessment Programme which were recently brought by the Union Government in 2020.
Trade Agreements— RTAs and FTAs
The concept of free trade was first developed as an idea to promote colonialism. The laissez-faire policy of free trade largely depends upon the demand and supply of the day and tends to free ‘commerce and trade activities’ from the grip of the government’s control. The Hon’ble Supreme Court of India, in State of Punjab v. Bajaj Electricals Ltd., reported in AIR 1968 SC 739, termed ‘trade’, in its very primary sense, as a repeated business activity of exchanging goods for goods or goods for money with a profit motive. With rising trade transactions, the expectations of businesses are also changing all over the world, whereby, the customs authorities are expected to introduce more and more efficient clearance procedures.
Trade agreements are one of the instruments of international trade policy developed to promote international trade between different countries. Thereby, the member countries of the World Trade Organisation (hereinafter “WTO”), due to slow progress of its negotiations, are permitted, under three sets of rules, i.e. under Art.XXIV of the General Agreement on Tariffs and Trade (“hereinafter” GATT), under Paragraph 2(c) of the Enabling Clause and lastly under Art.V of the General Agreement on Trade in Services (hereinafter “GATS”), to enter into Regional Trade Agreements (hereinafter “RTAs”) with other economies. RTAs are reciprocal trade agreements between two or more partners to apply lower trade policy barriers to goods and services imported from the members than to those imported from third countries. Several RTAs have been entered into by various countries, such as the South Korea-ASEAN FTA in 2007, the Japan-ASEAN FTA in 2008, the ASEAN-India FTA in 2009, etc.
Therefore, India has also entered into many bilateral and multilateral trade arrangements with other economies and regional blocs or groupings, since the liberalisation of its economy started in 1991. A Free Trade Agreement (hereinafter “FTA”) is an agreement between two or more countries to facilitate substantive trade of goods, services and even intellectual properties between them by reducing or eliminating tariff and non-tariff barriers. It may contain a set of conditions consistent with the international trade rules under which preferential rates of tariffs or duties are extended on specified goods or services imported from a beneficiary country under the agreement. FTA members may also elect to impose a Common External Tariff (CET) for each product, which may be imposed with or without the continued use of internal customs controls. Some of the renowned FTAs are the European Free Trade Association (EFTA) between Norway, Iceland, Switzerland and Liechtenstein, North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada. India had signed the ASEAN FTA with 10 nations including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam which entitled exports from such countries to India at a preferential rate of duty.
Art.XX of the GATT, as an exception, provides for preferential tax rates on the imports of specified goods under trade arrangements. As far as Indian Customs Law is concerned, S.5 of the Customs Tariff Act, 1975, similarly allows lower duty under a trade arrangement subject to certain conditions provided therein. For instance, Notification No. 69/2011-Cus., dated 29th July, 2011 grants exemptions from duties exceeding the prescribed rates on specified goods under the Comprehensive Economic Partnership Agreement (CEPA) between India and Japan.
Breach of Rules of Origin and Indian Trade Deficits
Every FTA provides elaborate Rules of Origin (hereinafter “RoO”). These RoO are needed to be complied by the importers, for availing the concessional rate of customs duty under the FTA. Similarly, an importer is also required to obtain the Country of Origin (hereinafter “CoO”) certificate from the agency specified in Annexure 2B of the Handbook of Procedures, 2015-20. It is an instrument to establish evidence on the origin of goods imported having two versions, preferential and non-preferential. Thereby, the CoO certificate is required even when there are no preferential rates of duty. Earlier, merely the submission of CoO certificate by the importers was deemed as the proof of fulfilment of originating criteria in India to avail the benefits of FTAs, thereby, absolving the importers from complying with the RoO. This has led to increasing trade irregularities and undue claims to benefit under FTAs by fraud and manipulating the requisite criteria. According to the Ministry of Finance (India) in the last five years, the Customs Department had detected fraudulent claims under FTA amounting to INR.12,000 million.
Due to these malpractices, a recent apprehension is that most of the FTAs that India had signed have not worked in its favour. To substantiate, these agreements are worsening India’s trade deficit with the contracting States. In the case of ASEAN Countries, the merchandise trade balance has risen by 120% from USD.10 billion in 2010 to USD.22 billion in 2020. Similarly, India’s trade balance with Vietnam has been reversed from the position of a surplus of USD.2 billion at the start of FTA in 2010 to the position of a trade deficit of about USD.3 billion. Another reason for the said worsening of trade deficits, according to customs officials, is the diversion of its supplies by China to India through ASEAN nations to illegally take advantage of duty-free market access under FTA by abusing RoO.
Recent Developments— Section 28DA and CAROTAR, 2020
To check the aforesaid menace, the Central Government came out with stringent provisions for allowing the preferential rate of customs duties on products imported under FTAs. A new Chapter VAA and S.28DA have been inserted in the Customs Act, 1962 vide Section 110 of the Finance Act, 2020. Subsequently, the C.B.I. & C. vide Notification No. 81/2020-Cus. (N.T.) and Circular No. 38/2020-Cus., dated 21st August 2020, introduced the CAROTAR with effect from 21st September, 2020. These new norms will now check inbound consignments of low-quality products and dumping of goods by a non-contracting State through its FTA partner State.
CAROTAR, 2020— Broad Framework
CAROTAR’s framework can be broadly classified under six heads i.e., preferential tariff claim, origin related information to be possessed by the importer, requisition of information from the importer, verification request, identical goods and miscellaneous aspects.
(1) Preferential Tariff Claim (R.3): To claim preferential rate of duty under a trade agreement, an importer or his agent shall, at the time of filing Bills of Entry shall:
a) Declare that the goods qualify as originating goods for a preferential rate of duty under the particular agreement.
b) Indicate the respective tariff notification against each item on which preferential rate of duty is being claimed.
c) Produce CoO certificate covering each item on which preferential rate of duty is claimed.
d) Provide details of CoO certificate i.e. reference number, date of issuance, originating criteria, an indication of accumulation, if any, whether issued by a third country and indication if goods being transported directly from the country of origin.
Reasons for denial of claims – If Bill of Entry found incomplete, if not in the prescribed format, alterations if not authenticated by the Issuing Authority, produced after expiration of validity period, and issued for an item then is not eligible for the preferential tariff.
(2) Origin related information (R.4): The new norms put the burden of additional compliance and risks followed for its non-compliance on the importers. The importer is now duty-bound to:
a) Possess information about the country of origin criteria, the regional value content, and product-specific criteria to submit to the proper officer on request. (S.28DA)
b) Keep all supporting documents (Form I) for at least five years from the date of filing of the bill of entry and submit the same to the proper officer on request.
c) Exercise reasonable care to ensure the accuracy and truthfulness with regard to aforesaid information and documents.
(3) Requisition of information from the importer (R.5): To ascertain the correctness of the claim, a proper officer may call for information or documents from the importer. He will be under obligation to provide or submit the same within ten working days from the date of such information or documents sought. Upon satisfaction, the proper officer shall communicate his approval of claim to the importer in writing within fifteen working days from the date of receipt of requisite information or documents. In the case of non-satisfaction, the proper officer shall forward a verification proposal to the nodal officer nominated for that purpose. Nevertheless, the Principal Commissioner of Customs or the Commissioner of Customs may, reasons in writing, disallow the claim of preferential rate of duty without further verification, where the importer relinquishes his claim or the information or documents furnished him provides sufficient reasons to prove that goods do not meet the origin criteria.
(4) Verification request by the proper officer (R.6): The proper officer may, during the course of customs clearance or even thereafter, request for verification of certificate of origin from Verification Authority if there is a doubt regarding the authenticity of the certificate of CoO for reasons say mismatch of signatures or seal with specimens of signatures or seals received from the exporting country, or on a random basis and as a measure of due diligence. Provided that a verification request may be made only where the importer fails to provide the requisite information or documents sought and such a request shall seek specific information from the Verification Authority to determine the origin of goods. In the case of information received is incomplete or non-specific, request for additional information or verification visit may be made to the Verification Authority in a prescribed manner. The proper officer may suspend the preferential tariff treatment of such goods till the conclusion of the verification. On the request of the importer, he may provisionally assess and clear the goods, subject to furnishing a security amount equal to the difference between the duty provisionally assessed and the preferential duty claimed. The proper officer shall conclude the verification within forty-five days of receipt of the information or extended period. Wherever a strict timeline to finalize verification is prescribed in the ‘RoO’, he shall finalize the verification within such a timeline. The proper officer may deny the claim of a preferential rate of duty without further verification where the Verification Authority fails to respond to verification request within prescribed timelines, or the importer did not provide the requested information in the manner prescribed in the ‘RoO’, or that the information or documents furnished by the Verification Authority provide sufficient evidence to prove that goods do not meet the origin criteria.
(5) Identical goods (R.7): In the case of goods that originate from an exporter or producer does not meet the origin criteria prescribed under ‘RoO’, the Principal Commissioner of Customs or the Commissioner of Customs is empowered to reject other claims of a preferential rate of duty, filed prior to or after such determination, for identical goods imported from the same exporter or producer without further verification by informing the importer with reasons of rejection in writing including the detail of the cases wherein it was established as such. Upon fulfilment of manufacturing or other origin related conditions, the Commissioner may restore preferential tariff treatment on identical goods with prospective effect.
(6) Miscellaneous (R.8): The proper officer shall verify assessment of all subsequent bills of entry filed with the claim of preferential rate of duty by the importer, in order to prevent any possible misuse of a trade agreement. The system of compulsory verification of assessment shall be discontinued once the importer demonstrates that he is taking reasonable care, as required under S.28DA. Where an importer has suppressed the facts, made wilful misstatement or collusion with the seller to avail undue benefit under the trade agreement, his claim of preferential rate of duty shall be disallowed and he shall be liable to penal action as provided therein. In the event of a conflict between a provision of these rules and a provision of the RoO, the provision of the RoO shall prevail to the extent of the conflict.
Faceless Assessment Programme
The Central Government also came out with the Faceless Assessment Programme under the Turant Customs framework on 4th September, 2020 vide Circular No.40/2020 effective from 31st October, 2020 to assist the CAROTAR. This particular development is a promising move for improving the Ease of Doing Business in India. It has introduced a continuous, faceless, contactless, and paperless, i.e. digital-based clearance system which allows an assessing officer, present in a particular jurisdiction, to assess and give out-of-charge to a Bill of Entry pertaining to imports made at another Customs station. This aims to make the administrative process more efficient and professional. Therefore, the Indian Customs has accordingly made improvements within the Indian Customs EDI System (ICES) to streamline the flow of information between the importer and the administration. The Single Window System (to submit documents for filing Bill of Entries) has also been modified in order to comply with the mandatory declarations of CAROTAR. Keeping in mind the additional verifications mandated under CAROTAR, an online repository is established by the Indian Customs authorities for facilitating online checks of the signature/seals of the CoO issuing authority of various FTA countries.
The CAROTAR came under the wake of Go Vocal for Local campaign initiated by the Indian government and can be seen as a major motivator for the Indian domestic industries. These rules seek to protect and stabilise the domestic economy of India by cutting down fraudulent imports. However, CAROTAR, even after the adoption of the Faceless Assessment Programme, poses some big hurdles towards the centralised goal of promoting ease of doing business in India. To conclude, the extremely tough compliance challenges imposed under CAROTAR may pose legal hindrances to its very application if the justified limits are breached by the concerned authority for seeking requisite information from the importers. However, keeping in view the legislative intention behind CAROTAR to catch only the foul players, it’s expected that due diligence and proper documents will satisfy the Custom Authorities about the existing and prospective imports. Therefore, the Central Board of Indirect Taxes and Customs (CBIC)’s internal customs division, on 17th December, very interestingly instructed field officers to avoid raising unnecessary requests for verification of preferential certificates of origin under the Customs Administration of Rulf Origin under Trade Agreements Rules or CAROTAR for the judicious application of CAROTAR. Anyhow, importers should avoid breaching the provisions of CAROTAR, to enjoy an uninterrupted claim of preferential trade tariffs. Now, one is to observe whether this move will be successful in achieving its desired objectives or will it end up as another setback to India’s image on “ease of doing business”.