India Amends Customs Act To Set Stage For UK, EU FTA's

To facilitate signing free trade agreements (FTAs) with developed nations such as the UK and European Union, the Union Budget 2024 has introduced significant amendments to the Customs Act. These changes liberalise compliance with value-addition norms, which typically prevent the misuse of concessions agreed upon in trade pacts.

Value addition norms, guided by ‘rules of origin,’ are crucial as India continues to sign numerous FTAs. These rules determine the national source of a product, ensuring that third countries do not unjustly benefit from the concessions, which could result in revenue losses. On Tuesday, the government amended Section 28DA of the Customs Act, 1962, substituting the term ‘certificate’ of origin with ‘proof’ of origin. The Budget details define “proof of origin” as a “certificate” or “declaration” in line with a trade pact.

Tax experts noted that the amended Customs Act now allows for the acceptance of “proof” of origin, which includes both a certificate of origin and a self-declaration, aligning with global customs norms. However, there are concerns about implementation, as allowing self-certification could lead to breaches without a high degree of integrity from the exporting country, potentially reducing India's Customs revenue.

Former Chairman of the Central Board of Indirect Taxes and Customs (CBIC) S Ramesh explained that these amendments would impact future trade agreements, including the one with the European Free Trade Association (EFTA), which permits self-certification. 

This change comes as British Foreign Secretary David Lammy visits India to advance negotiations for the India-UK FTA. Additionally, India is set to resume talks with the EU following a pause during general elections.

Despite the benefits, there are risks associated with rules of origin breaches. A report by the Global Trade Research Initiative (GTRI) highlighted a significant increase in silver imports from the UAE, a country that does not produce silver, suggesting a potential breach of the rules of origin under the India-UAE FTA. 

To address such issues, India introduced stringent rules of origin verification norms, CAROTAR, in 2020, following instances of goods being rerouted through FTA partner countries.