THE GIST of Editorial for UPSC Exams : 12 February 2020 (How Budget counters ‘origin fraud’ in FTAs (The Hindu) )

How Budget counters ‘origin fraud’ in FTAs (The Hindu)

Mains Paper 3: Economy
Prelims level : Origin fraud in FTAs
Mains level : Counter mechanism to fraud in trade sector

Context:

• Free Trade Agreements (FTAs) signed by India with any country or group of countries entitle exports from such countries to India to a preferential customs duty rate, often nil rate.
• Budget 2020-21 has proposed a change in the Customs Act that places the onus on the importer to verify the origin of goods being imported into India using the FTA route.

Country of origin:

• Goods from an FTA partner are eligible for benefits only if it is the country of origin (COO) of such goods.
• A COO is one in which at least 35 per cent value addition of the good has happened. But it is difficult for India to find out how much of a good coming to Indian shores has been developed in the FTA partner country. This constraint is often exploited to commit origin frauds.

Origin frauds:

• Origin frauds are of two types — transshipment and general assembly.
• Under transshipment, goods originating from a third country are routed through an FTA partner into India, to take advantage of low duty rates.
• Under general assembly, parts are separately exported from the third country to the FTA partner, where assembling happens before despatch of the goods to India.
• In both cases, fraudsters manage to get COO certificates from the FTA partner country.\
• For instance, the import of stainless steel from Indonesia grew from about 8,000 tonnes in year ending March 2018 to 67,000 tonnes in year ending March 2019: a spike of over 700 per cent in a single year.
• Indonesia cannot add this much additional production capacity in a single year. The Indian Stainless Steel Development Association (ISSDA) claimed that these goods are of Chinese origin.
• They were routed through Indonesia because China has an FTA with ASEAN (which includes Indonesia), and ASEAN has an FTA with India. India imposes customs and countervailing duty on direct import of stainless steel from China.

Artificially low prices:

• Prices of Chinese goods are artificially low, as pointed out by Parliamentary Standing Committee on Commerce of the Rajya Sabha in a report tabled in 2018.
• The report has pointed out that China has been found guilty of unfair trade practices like export incentives and deep subsidies in contravention of WTO regulations.
• China has also been long accused of manipulating its currency to maintain export competitiveness. The report mentions that maximum anti-dumping measures world over have been imposed on China.
• It leads to under-utilisation of existing capacity and unforeseen crisis for domestic entrepreneurs. Origin frauds circumvent the country’s trade defence measures by routing Chinese goods through India’s FTA partners.
• The problem has become especially acute in recent times due to two events: the US-China trade war and the Belt and Road Initiative (BRI) of China.
• The US could influence other countries to go after origin frauds because of its economic might.
• The Belt and Road Initiative gives China logistics access to many countries along the old Silk Route and the so-called maritime Silk Route. Chinese exporters can use the logistics and port infrastructure in any of these countries to export Chinese goods to India. It will be extremely difficult for India to verify the country of origin.

Preventing abuse:

• There is zero deterrence on origin frauds, because India cannot go after foreign suppliers. As per Section 9A of Customs Tariff Act 1975, India can impose anti-circumvention duties on conduit countries.
• However, investigations by following due process have proved to be quite lengthy.
• Impact of origin fraud on domestic industry can be dramatic in the short-term. Hence, there is a need to implement anti-abuse checks at the point of entry.
• Placing the onus of proof of ‘country of origin’ on the importer is normally not a sensible approach. Buyers and sellers in an open market interact on a contingent basis, and cannot be expected to know each other’s affairs.
• But this is not an ideal situation, and this is perhaps the best action that can be taken by a destination nation to prevent abuse of free trade agreements.

Way forward:

• In contemporary times, production process is highly technology driven. Goods differ widely on technical specifications.
• Volume importers generally inspect the factories of their suppliers, and appoint sourcing agents for quality control.
• They would normally be aware of the value addition to their goods in various territories.
• Placing an onus on importers will deter them from purchasing transshipped goods.

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Prelims Questions:

Q.1) With reference to the Female Genital Mutilation (FGM), consider the following statements:
1. Every year, February 6 is observed as the International Day of Zero Tolerance for Female Genital Mutilation (FGM).
2. WHO classifies four types of Female Genital Mutilation (FGM).

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both
(d) None

Answer: C
Mains Questions:
Q.1) What do you mean by origin fraud? What are the types of it? How it puts the onus of verifying ‘country of origin’ of goods on importers?