The Union Budget for 2020 reversed liberalisation of the customs tariff regime by increasing customs duties across the board. The most significant change, however, was not a mere rejig of rates, but a potential challenge to India’s standing in the global supply chain.
Global trade relies on a simple but vital document — the ‘Certificate of Origin’ (COO). A COO is akin to a birth certificate for exported goods. Free Trade Agreements (FTAs) grant the benefit of reduced rates of customs duties to the importing country — provided the value addition in the country of origin/exporting country is reasonable (around 35-40 per cent generally). These benefits are extended in trade and diplomatic policy by identifying goods based on COOs. A popular example is the ‘Generalised System of Preferences’ provided by developed countries to least developed countries.
This system relies on trust, as verification is performed by an external agency in another country. Unfortunately, the system is also vulnerable to manipulation. ‘Origin fraud’ involves the outsourcing of certain minor processes, such as assembly, or even mere transshipment, to obtain a certificate of origin and claim duty benefits.