The Economic Times (11/02/2020) - This Union budget has sought to increase customs duties on a range of products. This is, perhaps, keeping GoI’s ‘Make in India’ initiative in mind. It has also sought to introduce a new provision, Section 28DA, in the Customs Act to tighten imports under free and preferential trade agreements (FTAs and PTAs).
One can recall that after longwinded negotiations that commenced in November 2012, India finally chose not to join the Regional Comprehensive Economic Partnership (RCEP) last November. Among the various reported concerns that prompted the decision were those related to Rules of Origin (RoO).
RoO in FTAs are designed to ensure that concessions envisaged in such agreements are granted only to products originating in the jurisdiction of the parties to the agreements.
Preferential RoOs stipulate minimum requirements that have to be fulfilled to identify the goods, which can benefit from preferential market access. Without these rules, goods could simply be transhipped. They are, thus, aimed at preventing trade deflection.
India has 16 trade agreements, with several others at various stages of negotiations. In fact, the door hasn’t been shut for RCEP either. While there has been an increase in imports as a result of PTAs (the receipt budget 2020-21shows the revenue impact in 2018-19 to be `48,793 crore, with the projected amount for 2019-20 as `65,734 crore), there has been no corresponding increase in exports. Instead, there have been several cases of misuse of FTA benefits — gold jewellery, flat TVs, betel nuts, etc.
In these cases, the customs department has faced legal challenges. The courts have held that customs cannot go beyond the certificate, even though investigations have suggested that the certificate, even when genuine, has not been issued correctly.
This, despite customs notifications, which permit such preferential rate of duty imports, and empower the authorities to deny the benefit sought in the event of imports not being in accordance with the rules.
Obviously, a need was felt — both with the experience of previous imports under FTA, and the RCEP negotiations — to have statutory authority for dealing with such situations of misuse, rather than address the issue through the instrument of delegated legislation. Finance minister Nirmala Sitharaman laid the ground for this in her budget speech, ‘It has been observed that imports under FTAs are on the rise. Undue claims of FTA benefits have posed threat to domestic industry. Such imports require stringent checks.’
The proposed Section 28DA merely puts in the statute many of the provisions that are in the notifications issued to operationalise FTAs. 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, power to suspend the provision of preferential tariff treatment pending verification… these are there in the extant notifications issued to facilitate preferential imports.
Even today, when requirements are not met, the benefit can be denied and applicable duty demanded. There is, however, one departure — Section 28DA(9) empowers the customs department to request for verification ‘within a period of five years from the date of claim of preferential duty’. This is in keeping with the requirements of on-site post-clearance audit. Having said that, the department would be well advised to exercise this power more as an exception, and only in cases of misdeclaration and fraud.
Liberalisation through PTAs have an impact on trade flows. RoOs are an integral part of this. Depending on how RoOs are thereafter implemented, they may promote or restrict trade. If the implementation of RoOs are more restrictive than necessary, they may have protectionist effects and end up acting as trade barriers.
The customs department has been at the forefront of taking measures to promote ease of doing business. It would need to continue on this road. While empowering itself, it should also exercise those powers with caution.
Read more at https://economictimes.indiatimes.com/blogs/et-commentary/duties-customs-need-to-excise-with-caution/