Why in news?

The Union Budget 2024 has introduced amendments to the Customs Act, easing compliance with value-addition norms that are usually in place to prevent the misuse of concessions agreed upon in a trade agreement.

What’s in today’s article?

• Rules of Origin
• Changes proposed w.r.t Rules of Origin in Budget 2024
• Several breaches in rules of origin

Rules of Origin

• About
  • Rules of origin are the criteria used to define where a product was made. They determine the economic nationality of a product in international trade.
• Criteria for Determining Origin
  • Wholly Obtained or Produced - Goods that are completely produced or obtained in a country, such as agricultural products, minerals, and fish.
  • Substantial Transformation - Products that have undergone substantial transformation in a country, typically defined by a change in tariff classification, a specific percentage of value added, or specific manufacturing processes.
• Benefits of Rules of Origin
  • Prevention of Trade Deflection
    • It prevents trade deflection, where goods are routed through countries with the lowest tariffs to take advantage of preferential trade agreements.
  • Encouragement of Local Manufacturing
    • By setting specific criteria for substantial transformation, these rules encourage countries to develop local industries and add value within their borders.
  • Trade Preferences and Economic Integration
    • They allow countries to grant trade preferences to their partners in FTAs, facilitating economic integration and boosting intra-regional trade.
  • Fair Trade Practices
    • Rules of origin ensure that only eligible products benefit from trade preferences, maintaining fair competition.
  • Customs and Trade Statistics
    • Accurate determination of origin helps in maintaining proper customs records and compiling trade statistics, which are vital for economic analysis and policy-making.
  • Protection of Domestic Industries
    • By defining which products qualify for preferential treatment, rules of origin can protect domestic industries from unfair competition from imported goods that do not meet the origin criteria.

Changes proposed w.r.t Rules of Origin in Budget 2024

• Amendment in Section 28DA of the Customs Act, 1962
  • The Indian government has amended Section 28DA of the Customs Act, 1962.
  • Through this, it has replaced the requirement for a "certificate" of origin with a broader "proof" of origin, which can be a certificate or a self-declaration in accordance with a trade agreement.
  • This change aligns with global customs practices and may be implemented if agreed upon in future trade agreements.
• Impact
  • Tax experts note that this amendment allows for greater flexibility in determining the origin of goods.
  • However, concerns are raised about potential breaches in self-certification and the need for high integrity in the exporting countries to prevent loss of customs revenue for India.
    • While developed countries have robust tracking systems and use self-certification in FTAs, India remains cautious due to past experiences with goods being diverted from countries like China via Indonesia and Vietnam.
  • The amendment could impact future free trade agreements (FTAs), such as the one with the European Free Trade Association (EFTA), which includes provisions for self-certification.

Several breaches in rules of origin

• Breaches in rule of origin
  • The amendments to the Customs Act allow Indian trade negotiators to choose which foreign exporters can self-certify the origin of goods, but India has faced several breaches in rules of origin.
  • A report by the Global Trade Research Initiative (GTRI) highlighted a suspicious 60-fold increase in silver imports from the UAE, a country that doesn't produce silver, indicating a possible breach of the rules of origin in the India-UAE FTA.
• Strict rules of origin verification norms to address issues related to breaches
  • In response to the breaches, mentioned above, India implemented strict rules of origin verification norms, known as CAROTAR, in 2020.
    • The CAROTAR provides the minimum basic information that the importer needs to know before importing goods.
    • These rules help the importer to ascertain the country of origin, assist Customs Authorities in the smooth clearance of import of goods under FTAs and claim concessional duty.
  • This move led to concerns from several Southeast Asian countries during the India-ASEAN FTA review.
• What needs to be done?
  • Despite these strict measures, India's trade deficit with ASEAN countries increased to $43.57 billion in FY23, up more than 40% from $25.75 billion in FY22.
  • Trade experts have noted that circumventing rules of origin is a recurring issue and that enforcing these rules requires robust customs administration.
  • They also highlighted the challenge of balancing ease of doing business with trade regulation.