IMPORTANCE OF TRADE COMPLIANCES DUE TO CHANGING TRADE SCENARIOS

[Ashutosh Nath]

Over the last few years, there have been drastic changes in trade policies of developed as well as developing nations. These changes are based on factors such as GDP growth, employment, protectionist policies, the relationship between trading nations, etc.

It is quite visible that global trade is facing headwinds and as it is forecasted, world is moving towards recession. Hence, Governments across the globe are already in negotiation with their trading partners on tariff rates and preferential benefits with the intention to protect the interest of their people and industry. We all might be aware of the recent trade disputes between two large economies of the globe where trade dispute has escalated with retaliatory tariffs on imported goods.

Geopolitics plays a vital role in international trade. Events such as breaking of unions, elections, trade war between nations, etc. have reduced global trade, as during the said period all major trade negotiations gets hindered. With the rising tensions and uncertainty among nations, no one is surprised that international trade has seen a decline, which is having a direct impact on economic growth, investment and jobs.

With the changing trade scenarios, what Indian entities can do to avoid trade hurdles and be more compliant?

Classification

Identifying the correct tariff code for goods is the primary activity in trade. Classification of goods is very relevant, not only from customs viewpoint, but also from obtaining licenses and approvals from participating government agencies of importing as well as exporting countries.

As you might be aware that customs duty rate varies for each tariff code and incorrect classification may lead to the incorrect payment of duties and there could be a case of wrong availment of duty exemption. Incorrect classification may also lead to increase shipment inspections, litigations and levy of hefty penalties by customs authority.

Last year, in India, the customs authorities flagged that many importers are casually using residuary code category i.e. ‘others’ without doing any due diligence. Government vide various Trade Notices has advised importers and exporters to carefully evaluate the HS code for goods instead of using ‘others’ category. Further, the Government is also planning to introduce licensing requirements for goods that are imported under ‘others’ HS Code, by shifting the items from ‘free’ to ‘restricted’ category.

It is a common practice that companies rely on customs brokers for classification of goods and unfortunately, companies don’t pay much to the classifications unless queries are raised from customs authority. Since Government has increased its vigilance on the tariff codes used for imported and exported goods, it is high time for companies to revisit their classifications.

Valuation

Customs valuation is a procedure to determine the correct value of the goods. Valuation is important as most of the customs duty is levied ad-valorem i.e. on the value of goods. Hence, the undervaluation of any goods may lead to a lesser payment of duty and future risk of litigations.

In many cases, transaction value of goods is accepted by the customs authority, provided that the buyer and seller of goods are not related parties. However, in cases where the trade is between related parties, more often than not, valuation is questioned and importer’s case is referred by the customs authorities to special valuation branch (‘SVB’) for determining the true and correct value of imported goods.

In some cases, customs authorities still question the declared value / assessable value of imported goods irrespective of the relationship between buyer and seller, depending upon the type of goods imported, comparison of value between different importers, specific sale conditions, the value of intangibles, etc.

Incorrect valuation of goods also invites interest and penalty payouts because of lesser payment of customs duty due to undervaluation. Also, the customs authorities may verify the valuation of each and every consignment of companies which have defaulted or have a history of incorrect valuation.

With the changing business scenarios, companies cannot afford to have their consignments stuck at ports or provide bank guarantees equivalent to the value of goods for early clearance of goods and simultaneously have a pile of litigations. Accordingly, companies need to be proactive by revisiting their agreements, identifying the cases wherein valuation could be challenged by authority and reference to SVB for the valuation of imported goods could be made.

Documentation

With change in time and technology, customs procedures have also evolved, wherein, now the authorities are encouraging importers and exporters to submit documents online on the government portal and avoid physical submission of documents. With the increase in digital transformation in customs procedures, assessments of import consignments are generally done before their arrival at the port which help importers to release their consignment on an immediate basis. Increased use of technology in customs processes has led to reduction in the dwell time to a great extent.

Apart from standard documents such as commercial invoice, packing list, bill of lading, carrier way bill, etc., one of the most important document is Certificate of Origin (‘CoO’) which defines the origin of the goods. CoO contains all the details related to imported product i.e. description of goods, tariff code, quantity, name of importer and exporter, etc.

CoO can be preferential as well as non-preferential i.e. preferential CoO is used when importer avails any tariff benefits under trade agreements and non-preferential CoO is used in cases wherein no reduced tariff duty is availed.

As in the last few days, it is very evident that customs authority have increased inspections on imported goods having the origin of specific countries. Due to change in political scenarios among the trading nations, importers need to be more aware of the country of origin of the imported goods and ensure the goods have proper documents at the time of import.

This article is co-authored by Mr. Palak Gangar. He is a consultant at Tradewin India.