An analysis of rules of origin provision under India-Australia trade agreement

Free Trade Agreement

Rules of origin are integral to any free trade agreement (FTA) as far as trade in goods is concerned. They are crucial to ensure that the benefits of the FTA are extended only to the goods originating in the territories of the parties to the FTA.

Chapter 4 of the India-Australia Economic Cooperation and Trade Agreement (ECTA) along with the annexures thereto lists the provisions on rules of origin under which goods can be said to be originating in India or Australia (originating goods) in any of the following cases:

· wholly obtained or produced goods [Article 4.4]; or

· goods covered under Product Specific Rules of Origin (PSR) [Annexure 4B]; or

· goods not wholly produced or obtained [Article 4.3].

Article 4.4 enumerates the items that will be considered as wholly obtained or produced and covers goods that are grown and harvested or raised or extracted in the territory of one or both member countries. It also includes goods produced in the territory of one or both member countries solely from other wholly obtained or produced goods. Examples of such goods include live animals, minerals, marine life, etc.

Goods that do not enjoy the status of “wholly obtained or produced” can nevertheless be treated as originating goods, if the following conditions are cumulatively satisfied:

· all non-originating materials used in the production of the good have undergone at least a change in tariff at the subheading level (six-digit level);

· the Qualifying Value Content (QVC) criterion is fulfilled; and

· final production process is performed in the exporting country.

Article 4.6 prescribes two methods for calculating the value addition:

· Build-up formula [1]: the value of the originating materials should be 35 percent or more of the FOB value of the good.

· Build-down formula [2]: the value of originating materials should be 45 percent or more of the FOB value of the good.

The value of the materials, whether originating or non-originating and whether imported or indigenously procured or captively produced, should be in accordance with the internationally accepted principles of customs valuation.

The ECTA mandates the parties to negotiate to bring all goods that are not wholly produced or obtained under the PSR.

These rules are applicable to specified goods produced in India or Australia or both, using non-originating materials. These rules lay down the requirements or criteria applicable to a particular subheading. If a good falling under a particular subheading satisfies the applicable requirements, only then will such good be treated as an originating good.

The governments can also use PSR as a tool to frame industry-specific policies. This can be illustrated in the following manner:

· Agricultural products will be treated as originating goods only if they are “wholly obtained or produced” in the territories. This is with a view to protect and promote domestic agricultural industries. This is also aligned with the fact that agriculture has always remained a sensitive issue for India.

· Articles of iron and steel covered under Tariff Headings 7206 to 7229 are required to satisfy the “melt and pour” rule, under which the raw material must be first produced in a furnace in its liquid state and then poured into its first solid state, in either Australia or India. This will ensure that the raw materials used in this industry originate in either India or Australia and not in a third country.

· The requisite QVC for goods covered under Tariff Headings 7113 and 7114 has been kept relatively low, 1.5 percent of the FOB value. This will promote export of jewellery and boost this sector.

In addition to the above, specific rules of origin provisions have been incorporated in the ECTA to deal with specific situations. Some of the important provisions include the principle of accumulation, which allows India to utilise raw materials originating in Australia to produce goods in India and to consider such raw materials as originating in India. Basically, this principle reflects the philosophy that India and Australia are a single unified market and encourages trade in raw materials between the two countries. This will also incentivise access to cheaper / a variety of raw materials for Indian manufacturers.

Another relevant principle is that of minimal operations. Goods cannot be said to be originating if only bare minimum activities such as packaging, disassembly into parts, or simple polishing operations are undertaken in the territory of India or Australia. This provision is incorporated to prevent circumvention of the rules of origin by passing off third-country goods as originating goods after conducting the bare minimum operations in the territory of the member country.

Specific rules provide for treatment of packaging materials for retail sale as well as transportation provide that the packaging materials used for transportation shall not be considered for determining the originating status of a good.

The underlying intent of the rules of origin provisions is to ensure that the benefit under ECTA is availed in respect of only those goods that satisfy the requirement of originating goods. Checks and balances have been put in place to avoid misuse of the FTA benefit. At the same time, the practical aspects of business operations such as outsourcing of processes to achieve core competence, routing of consignment through a third country, etc., have been taken into consideration to rationalise the rules.