What is CAROTAR and how does it apply to fta imports?

CAROTAR — the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 — is the legal framework that governs how India verifies whether goods imported under a Free Trade Agreement qualifies for the preferential duty rates the FTA offers. The preferential duty benefit belongs to the importer and the obligation to prove origin rests entirely on the importer and not the supplier or the issuing authority in the exporting country. Importers who cannot substantiate origin when Customs demands proof will lose the FTA benefit, pay the standard duty rate plus interest, and face penalties for misdeclaration.

What is CAROTAR?

The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, universally referred to as CAROTAR, are rules framed under Section 156 read with Section 28DA of the Customs Act, 1962. They were notified on 21 August 2020 by the Central Board of Indirect Taxes and Customs (CBIC) and came into force on 21 September 2020. CAROTAR applies to every import for which the importer claims a preferential customs duty rate under any Trade Agreement, including Free Trade Agreements, Preferential Trade Agreements, Comprehensive Economic Partnership Agreements or any other agreement to which India is a party that provides for preferential tariff treatment on the basis of origin.

The central obligation under CAROTAR is that an Indian importer who claims a preferential duty rate must possess, at the time of filing the Bill of Entry, sufficient information to establish that the imported goods satisfy the Rules of Origin applicable under the relevant trade agreement. This obligation exists independently of the Certificate of Origin (CoO) issued by the exporting country's designated authority. Possession of a valid CoO is a necessary condition for claiming the FTA benefit but it is not a sufficient condition.

CAROTAR requires importers to retain all documentation supporting an origin claim for a minimum of five years from the date of import. This documentation includes the Certificate of Origin, the supplier's declaration of origin, production records or process flow documents establishing how the goods were manufactured in the claimed country of origin, bill of materials confirming the origin and value of inputs used, and invoices from the supplier that disclose cost breakdown where value-added origin criteria are applicable. CBIC has specified Form I under CAROTAR as the standard format for capturing the origin-related information the importer must have on hand. While Form I is not always submitted with the Bill of Entry, the information it reflects must be available for production if Customs requests it.

Implications for businesses operating in India

For foreign exporters and manufacturers, CAROTAR has changed what an FTA supply relationship requires. It is no longer sufficient for a foreign manufacturer to provide an Indian buyer with a Certificate of Origin issued by the designated authority in the exporting country. Indian Customs can probe behind the CoO and demand the underlying manufacturing and input data. A foreign manufacturer who cannot provide their Indian buyer with production records, bill of materials, and input sourcing documents that substantiate origin has created a supply relationship where FTA benefits are commercially promised but legally unsupportable.

For Indian importers and traders, CAROTAR has fundamentally changed the risk profile of FTA-based sourcing strategies. Many Indian importers source from FTA partner countries, including ASEAN under the ASEAN-India FTA, Japan under CEPA, South Korea under CEPA, and UAE under CECPA, specifically to benefit from preferential duty rates that reduce landed cost. CAROTAR means that the duty saving is at risk at every import and for five years after every import. Customs can re-open any FTA clearance within five years and demand production of origin documentation. If the importer cannot produce it, Customs raises a differential duty demand plus interest at 15 percent per annum from the date of the original clearance, plus penalties.

For Customs House Agents and freight forwarders, CAROTAR creates a professional obligation to advise clients who are claiming FTA benefits on the documentation requirements before the shipment arrives. A CHA who claims an FTA duty rate in a Bill of Entry without confirming that the client holds the required origin documentation is exposing the client to post-clearance demand.

How CAROTAR compliance works

CAROTAR compliance begins at the procurement stage, not at the port. When an Indian importer decides to source goods from an FTA partner country and claim preferential duty rates, the first step is to confirm that the goods genuinely satisfy the Rules of Origin under the applicable trade agreement. Rules of Origin vary by agreement: the ASEAN-India FTA uses a combination of tariff shift and Regional Value Content rules; the India-Japan CEPA uses product-specific rules; the India-UAE CECPA, which entered into force on 1 May 2022, has its own origin framework. The importer must identify the specific rule applicable to their goods under the relevant agreement and confirm with their foreign supplier that the goods are manufactured in compliance with that rule.

The importer then requests from the foreign supplier the Certificate of Origin, issued by the designated authority in the exporting country. In parallel, the importer requests the supporting documentation: production records, bill of materials, input invoices showing origin and cost of all significant raw materials and components, and any process documentation that demonstrates the value-added transformation required by the origin rule. This documentation is retained by the Indian importer.

At the time of filing the Bill of Entry, the importer's CHA declares the FTA benefit claim, references the applicable trade agreement and the Certificate of Origin details, and enters the preferential duty rate. If Customs has reason to doubt the origin claim, through risk-based selection, intelligence, or routine verification, it can issue a notice under Section 28DA of the Customs Act requiring the importer to produce the origin documentation. If the documentation satisfies Customs, the preferential rate stands. If the documentation is insufficient, Customs rejects the origin claim and raises a duty demand for the differential amount plus interest and potentially a penalty.

Legality and risks

CAROTAR is enacted under the authority of Section 28DA of the Customs Act, 1962, a section specifically inserted to address the systemic abuse of FTA tariff benefits through fraudulent or unsupported origin claims. Under Section 28DA, where Customs is not satisfied with the origin claim, it may reject the preferential rate and demand payment of the full standard duty. The demand is issued under Section 28 of the Customs Act, 1962, with interest at 15 percent per annum from the date the duty ought to have been paid.

Beyond the duty and interest demand, importers who make origin claims that Customs determines to be fraudulent face penalties under Section 114A of the Customs Act at a rate equal to the duty evaded. In cases involving wilful misstatement or suppression of facts, the penalty can be up to five times the duty evaded under Section 114. Where the fraud involves a foreign manufacturer or intermediary deliberately misrepresenting origin, Customs has mechanisms through trade agreement joint committee frameworks to flag the issuing authority in the partner country for verification at source.

Word of counsel

Importers are advised to be particularly alert to the transshipment scenario. India has FTAs with ASEAN, including countries such as Vietnam, Malaysia, and Thailand. China does not have an FTA with India and Chinese goods attract full MFN duties. There is a documented pattern of Chinese-manufactured goods being routed through ASEAN countries with ASEAN Certificates of Origin, claiming preferential ASEAN-India FTA rates on arrival in India. Importers sourcing goods from an ASEAN country in a product category where China is the dominant global manufacturer must verify the actual manufacturing origin of their supplier's goods, not merely the country of export. Customs scrutinises origin documentation with particular intensity in these categories, and the review can go back five years and cover every shipment in the product category.

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