A White Paper by CII-EY team believes that the proposed initiative would help companies plan their production and sourcing chains. Moreover, this would also help customs officials in the smooth application of ROO and thus avoid problems resulting from varied ROOs.

The Paper titled ‘Evolving global tax policy trends: Outlook for India' has discussed ROO under a section captioned ‘India's Free Trade Agreements: trends and challenges.”

ROO help determine the eligibility of goods to receive preferential tariffs under an FTA based on whether or not they are wholly obtained or produced in the territory of the FTA party.

The Paper notes: “In most of India's FTAs, where a product is not wholly obtained or produced in the territory of an FTA party, the primary method of determining the origin of the goods is based on the twin criteria of “value added content” and “change in tariff classification.”

The value-added content rule requires that a certain specified minimum percentage of local content be added to a product in the country where the origin is being claimed. The required value-added content percentage may vary across FTAs. The change of tariff classification rule, on the other hand, is based on a tariff shift, which means that the product at issue must be classified under a different tariff heading than the tariff heading of the components used in the production of that good. While some FTAs require a change of tariff classification at the four-digit level, others do so at the six-digit level.

ROO pertaining to each FTA may therefore be different and therein lies the challenge to an company seeking to avail of FTA concessions. In addition, India may have agreed to grant different levels of duty concession to a particular imported product from the same country under multiple FTAs. For instance India offers duty concessions to imports from Malaysia under the India-Malaysia FTA as well as the India-ASEAN FTA. As a result, companies may have a choice between multiple FTAs for availing preferential benefits when trading with one country.

ROO under these FTAs, however, differ and therefore, though a product may originate from the partner country under one FTA, it may not satisfy the rules of origin under another. The number of overlapping FTAs and the distinct set of rules specific to them pose a problem for companies.

Structuring production processes specifically for each FTA raises compliance costs for importers. Furthermore, calculating whether a product satisfies the value-added content requirement of an FTA can be cumbersome and requires sophisticated accounting systems.

Adherence to customs formalities adds to the complexity of complying with the rules of origin. The intricacies of calculating the value added content may result in a difference between the importers determination of origin and the customs authorities' findings with regards to the origin.

The Paper points out “there also exist certain hurdles for the industry seeking to secure benefits under the FTA, once it is in place. Engaging with the government in the context of India's current FTA negotiations is crucial for the industry facing barriers in their trade and investment dealings with overseas markets.”

It adds: “The onus to raise critical concerns regarding trade and investment restrictions with the negotiators on either side falls upon the industry. Therefore, the industry needs to actively engage in discussions with regard to concessions that prospective FTAs will cover.

In addition, to avail tariff benefits under existing FTAs, companies need to examine potential duty savings under such FTAs and to ensure that their products have been duly classified under the correct tariff code so that concessional duty rate can be availed of. Moreover, a company looking to secure duty concessions under a particular FTA must comply with the rules of origin requirement.