Decoding India’s Trade Agreements – Part –2

In my last article ‘‘Decoding India’s Trade Agreements – Part –1‘ , I had discussed about the various types of International Trade Agreements and their importance and as to why the exporters and importers should be aware of the various benefits available to them for the exports from India and imports into India. In this article, we will deal with the key requirements to claim the benefits.

Trade Agreement between two nations means that they will give preferential treatment to the goods imported from another partner country. This essentially entails that goods should actually be originated in the other country and not merely routed though the partner country.

In general, a certificate of origin is essential in international trade transactions because it is the proof certifying the origin of the product, which is in turn the basis to determine the tariffs and other trade measures that will be applied. Although satisfying rules of origin in principle means that a product has qualified for the originating status, and is thus entitled to preferential tariffs, in most cases, a claim for preferences must be accompanied by a Certificate of Origin (CoO) presented to the customs authority at the port of entry. Unlike the exporter or manufacturer, who is responsible for (and capable of) proving to the issuing authority (or self-certifying) the origin of the product, the importer often has little knowledge of how the product meets the origin criteria. The importer is instead required to present a proof, e.g., a certificate of origin issued or obtained by the exporter or manufacturer. Such separation of obligations means that even if a product may actually originate in a particular country, the importer’s failure to submit a certificate of origin may cause the good to be barred from enjoying preferences.

Based on the agreements with various countries, India has devised its own Rules of Origin basis which the CoO should be issued with that respective country. Thus, for example, if preferential treatment has to be provided to goods exported to Japan from India by the Japan government, then the Indian exporter has to meet the criteria of origin given in the Customs Tariff (Determination of Origin of Goods under the Comprehensive Economic Partnership Agreement between Republic of India and Japan) Rules. Simultaneously, the Japan government has also devised their own rules of origin for India basis the agreement between the two.

The term Certificate of Origin is defined in the Guidelines on Certificate of Origin issued by World Customs Organization (Guidelines by WCO) as “a series of procedures to establish the originating status of the goods through the presentation of a proof of origin”.

There are two types of CoO:

a. Preferential CoO

b. Non-Preferential CoO

Preferential CoO is required in order to be eligible for the preferential treatment between the participating countries. Article 2(1) of the WTO Agreement on Rules of Origin refers to the following as the possible coverage of non-preferential rules of origin: most favoured nation (MFN) treatment, anti-dumping and countervailing duties, safeguard measures, origin marking, quantitative restrictions, tariff quotas, government procurement and trade statistics. Thus, non-preferential certificates do not grant the eligibility for benefits.

The Guidelines by WCO, apart from the issuance of CoO by the designated authorities, recognizes the following systems of issuance of CoO in clause 5.2:

• Approved Exporter System (AES) – Under the approved exporter system, an exporter approved by the competent authority will be able to make out a declaration of origin on an invoice or other commercial document. In a vast majority of the FTAs using such system, the principal proof of origin is a certificate of origin issued by the competent authority of the exporting country.

The approved exporter status is provided as an exception or special privilege for an exporter that has gone through an approval process with the competent authority. The exporter that wishes to be granted the approved exporter status must provide sufficient information to the competent authority in order to ascertain that he knows the rules and procedures and is actually in a position to determine the origin of the goods. The information on the exporters granted approved exporter status may be shared among the parties to the FTA.

• Registered Exporter System (REX) – The registered exporter system goes a step further in facilitation compared to the approved exporter system. In order to become a registered exporter, an exporter would only be required to provide certain prescribed information. Basically the registration process is a mere manifestation of the required information and there is no evaluation of the information at the time of registration. The information on the registered exporter will be shared with the Customs of the importing country who will use the information for risk assessment process.

• Fully Exporter based system – this is again a step further from the above two systems. This is merely on the declaration of the exporter. In this connection, it is generally understood to be coupled with a verification system which allows for a direct enquiry by the Customs authority of the importing country to the exporter/producer who issued the proof of origin.

• Importer based system – The most liberalized procedure for certification of origin is the importer-based system. Under this particular system, importers are allowed to make origin declarations or merely give an indication of the origin based on their own knowledge about the imported goods when claiming for a preferential tariff treatment.

The Guidelines by WCO further give the guidelines as to what has to be followed for following a particular type of system by the signatory countries.

In India, the competent authorities are designated to issue the CoO. The entire system of issuance of CoO has now been made online. Apart from this, India is also now moving to the AES and REX systems. But the last two systems i.e. exporter based and importer based systems are not followed in India.

In terms of Para 2.61 of the Foreign Trade Policy, AES is an optional system of self certification with a view to reduce the transactional cost. The manufacturers who are also status holders shall be eligible for AES. AES can self certify their manufactured goods as originating from India with a view to qualifying for various FTAs/PTAs/CEPA/CECA etc. which are in operation. Status holders will be recognized by DGFT as AES for self certification based on availability of required infrastructure, capacity and trained manpower as per details in Para 2.109 of the Handbook of Procedures 2015-2020. Appendix 2F provides detailed guidelines for getting oneself registered as AES. However, this scheme will come into effect only when it is incorporated in the relevant Agreement between the countries and the same is appropriately notified by DGFT. So, one needs to check the relevant trade agreements before analyzing whether to go for AES system or not.

In India REX is applied only for European Union-Generalized System of Preferences (EU-GSP) wherein EU provides the unilateral benefits to the goods imported from India. The EU has introduced a self certification scheme for certifying the rules of origin under GSP from 1.1.2017. Under REX, exporters with a REX number are able to self-certify the statement on origin of their goods being exported to EU under GSP scheme. There are detailed guidelines given by DGFT to implement REX in India.

Thus, AES and REX are essentially different though majorly fulfilling the same purpose. AES is for the countries with which India has trade agreements and REX is under EU-GSP which grants benefits to imports from India to EU unilaterally.

Therefore, in order to undertake any import or export to or from India, it is imperative that the importers and exporters get detailed study done of the FTA benefits available to them. Exporters can also analyze to get themselves registered as AES or REX depending upon the country of export. It will ease out their processes at the time of export and will confer a status to them.

For more details, reach out to the author at shweta@rsalegalsolutions.com.