A Free Trade Agreement (FTA) is a pact between two or more countries or trading blocs. They mainly agree to lessen or do away with customs tariff and non-tariff barriers for substantial trade between them. This agreement affects trade in goods such as agricultural or industrial products, or services like banking, construction, trading etc. They also touch upon other areas including intellectual property rights (IPRs), investment, government procurement and competition policy. India has established FTAs with various countries, like UAE, Mauritius, Japan, South Korea, and Singapore, plus ASEAN members.
The Benefits of Free Trade Agreement
By eliminating tariffs and certain non-tariff barriers, FTA partners obtain easier market access into each other’s countries. Exporters favour FTAs over multilateral trade liberalisation since they receive preferential treatment above non-FTA member country competitors.
The Role of Central Board of Indirect Taxes and Customs (CBIC)
Recently, the Central Board of Indirect Taxes and Customs (CBIC) issued a circular urging customs officers to be sensitive when applying the CAROTAR (Customs Administration of Rules of Origin under Trade Agreements) Rules, 2020 and to maintain accordance with the provisions of relevant trade agreements or their Rules of Origin.
It was stated that exemptions specified in an FTA regarding the country of origin will hold precedence if there is a conflict between the revenue department and the importer.
An Overview of CAROTAR Rules
The CAROTAR, 2020 rules set regulations for enforcing the ‘rules of origin’ for permitting preferential rate on imports under FTAs. These rules enhance the existing operational certification procedures prescribed under different trade agreements and were established in August, 2020 by the Ministry of Finance.
The provisions of CAROTAR include requirements for importers to perform due diligence before importing goods to ensure that they fulfil the prescribed originating criteria. Importers have to enter certain origin-related information in the Bill of Entry, as indicated in the Certificate of Origin.
Implications of CAROTAR Rules
These rules are designed to enforce proper procedure and transparency in imports. It will help importers correctly ascertain the country of origin, properly claim the concessional duty and assist customs authorities in facilitating the clearance of lawful imports under FTAs. The domestic industry will be protected from misuse of FTAs.
Additional Provisions of CAROTAR Rules
To avail concessional rate of customs duty under FTAs, importers have to ensure that imported goods comply with the prescribed ‘rules of origin’ provision. They also need to demonstrate that the imported products have undergone value addition of at least 35% in the countries of origin. Previously, only a certificate of origin issued by a notified agency in the exporting country was needed to access the benefits of FTAs, this has been subject to misuse in several instances.
Under these rules, a country that has signed an FTA with India can’t dump goods originating from a third country into the Indian market by simply labelling it. This ensures that the FTA partner countries have the necessary technological capacity for the required value addition and are not falsely claiming to have produced the goods in question.