CAROTAR 2020: Balancing Trade Facilitation with Enforcement in India’s FTA Regime

- by Mr. Shankey Agrawal, Partner at BMR Legal Advocates. With research assistance by Avishi Shukla, Member at CBLT Editorial Board.

Introduction

The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (“CAROTAR 2020”) were introduced to prevent the misuse of preferential tariffs under Free Trade Agreements (“FTAs”), ensuring tighter compliance for importers through the requirement of detailed origin information and supporting documents. While the legislation was introduced to protect domestic interests, it has drawn considerable criticism due to its inconsistencies with the World Trade Organisation (“WTO”) Agreement on Rules of Origin as well as conflict with FTA-mandated verification procedures, which emphasize transparency and predictability. This article aims to critically examine the provisions of CAROTAR 2020 in light of the WTO’s Agreement on Rules of Origin, India’s treaty obligations, and emerging domestic jurisprudence. Furthermore, it proposes a calibrated enforcement framework that upholds regulatory integrity without overriding or violating FTA protocols or WTO commitments.

CAROTAR: A Brief Background & Policy Rationale

The past two decades have witnessed FTAs becoming the focus of Indian trade policy, a testament to the government's deliberate strategy to further integrate into the world economy and secure preferential access for Indian exports. FTAs with major partners like Japan, Korea, and the ASEAN bloc have been under negotiation to achieve higher competitiveness and economic cooperation. Preferential tariffs in such agreements are aimed at promoting market access and economic cooperation, along with reducing import duties. Despite this, India's trade deficits with some of its largest partners, like Japan and Korea, have grown. Such a paradox has sent many scholars into questioning whether the desired benefits of FTAs are being implemented enough to defend India's economic interests.

India’s participation in an expanding web of FTAs has coincided with rising concerns of circumvention and origin fraud. Preferential tariffs, extended to imports from FTA partners such as ASEAN, Japan, and South Korea, were being exploited by routing goods through intermediary jurisdictions without satisfying the requisite origin norms. Reports by the Standing Committee on Commerce (2018) and the Directorate General of Trade Remedies (DGTR) flagged this phenomenon, citing duty evasion and distortion of competitive neutrality as pressing challenges. The issue was further compounded by non-verifiable Certificates of Origin (“CoO”), inadequate importer-level diligence, and lack of a statutory origin verification regime.

One critical factor responsible for such erosion of benefits and lack of effectiveness is the abuse of Rules of Origin (“RoO”) provisions. These are intended to ensure that only products manufactured within the FTA partner nations qualify for Preferential Tariff Treatment (“PTT”). Despite this, India has also experienced widespread third-country transhipment, in which goods from non-members of the FTA are transhipped through members of the FTA to benefit from reduced tariffs, exploiting loopholes to circumvent the RoO requirements, and failure/refusal to provide adequate documentation by the exporters of partner countries.  

The policy impetus culminated in the enactment of Section 28DA of the Customs Act, 1962 via the Finance Act, 2020. This provision empowers the proper officer to verify the claim of preferential duty under a trade agreement and lays the groundwork for rule-making on the administration of RoO. In line with the said provision, India implemented the CAROTAR 2020 on 21st September 2020, which provides a clear legislative and procedural framework for the implementation of RoO under all the FTAs and preferential trade agreements. It places obligations on importers to act in due diligence and to have origin documents at their disposal for checking. Furthermore, it grants customs authorities the powers of verification and to deny PTT in cases of suspicion/non-compliance. In so doing, CAROTAR 2020 seeks to strike a balance between facilitating legitimate trade and safeguarding India's economic interests.

Policy Rationale & Objectives

CAROTAR 2020 is therefore India's legislative move towards stricter scrutiny of FTA imports, refraining from misuse of RoO, and safeguarding the revenue interests of the country as its fundamental policy goals.

• Aids in Avoiding Misuse of FTAs and Safeguarding Revenue

CAROTAR 2020 was implemented amidst an increase in trade irregularities and unjustified PTT claims under Indian FTAs. At its core, CAROTAR seeks to ensure that only genuinely originating goods — those satisfying the originating criteria under the relevant FTA — are entitled to preferential tariffs. The misuse of rules like “wholly obtained” and “change in tariff classification” had led to infiltration of non-qualifying goods, particularly in sectors such as electronics and chemicals. CAROTAR 2020 provides for elaborate procedures for validating origin claims through rigorous compliance stipulations. Such a system allows authorities to detect spurious claims and thus protect government revenue.

• Promotes Importer Due Diligence

One of the central objectives of CAROTAR 2020 is to shift more responsibility to importers to guarantee the legitimacy of the origin claims for PTT. Prior to CAROTAR, reliance was primarily placed on CoOs issued by designated authorities of the exporting countries. These documents were not always verifiable or accurate. CAROTAR introduces a self-declaration-cum-documentation obligation: importers must retain documents, including production processes, value addition computations, and supporting origin details for five years, as provided under Rule 4 of CAROTAR. Importers are now required to maintain accurate records of extensive information, including value addition, inputs, and support documents. This minimizes abuse of FTA benefits by only claiming legitimate claims.

• Enables Independent Action by Customs Authorities

CAROTAR 2020 provides Indian customs officials with the liberty to act in certain situations if cooperating countries under an agreement fail to respond within time. The officials may suspend PTT and seek additional information if officials have reasonable grounds to doubt claims of origin. By replacing the need for "Certificate of Origin"(‘CoO’) with "Proof of Origin," the 2025 amendments grant customs more authority to require alternative documents and inspect exports even more.

Legislative Framework

Inserted via the Finance Act, 2020, Section 28DA outlines the procedure for claiming preferential duty rates under trade agreements. It mandates importers to possess sufficient information to substantiate the origin of goods and empowers customs authorities to verify such claims. CAROTAR 2020 operates in conjunction with FTA-notices of preferential duties. The notifications establish the preferential tariff rates which will apply under each agreement and state that the benefits can only be utilized, subject to the condition that the importer is meeting both the RoO established under the FTA as well as the conditions under CAROTAR. This linkage ensures that the administrative and verification processes are linked and offer a common format for customs enforcement and importers claiming preferential treatment.

Key Provisions of CAROTAR, 2020

1. Declaration in Bill of Entry (Rule 3)

   Importers claiming preferential duty must declare that the goods qualify as originating under the relevant FTA. They must provide details such as the certificate of origin reference number, date of issuance, originating criteria, and whether cumulation is applied. 

   
   

2. Maintenance of Origin-Related Information (Rule 4)

   Importers are required to maintain specific information demonstrating compliance with origin criteria, including regional value content and product-specific rules. This information must be retained for five years from the date of importation. 

3. Verification Process (Rules 5 and 6)

   If customs authorities have reasons to doubt the origin claim, they may request additional information from the importer. Failing satisfactory response, authorities can initiate verification with the issuing authority in the exporting country. 

   
   

4. Treatment of Identical Goods (Rule 7)

   If a particular consignment is found non-compliant with origin criteria, customs may deny preferential treatment to identical goods from the same exporter, unless proven otherwise. 

   
   

5. Recent Amendments: Transition to ‘Proof of Origin’

   In March 2025, CAROTAR, 2020, was amended to replace the term “Certificate of Origin” with “Proof of Origin” across its provisions. This change broadens the scope of acceptable documentation, aligning India’s practices with global standards that recognize self-declarations by approved exporters.

   
   

WTO Legal Framework on Rules of Origin

General Agreement on Tariffs and Trade (“GATT”), 1994

WTO provides a legal framework for the administration of RoO, as required in determining the country of origin of products. In the General Agreement on Tariffs and Trade (GATT) 1994, certain provisions are of particular relevance to the regulation of RoO. Article I of GATT, the Most-Favoured-Nation (MFN) principle, prohibits discrimination among traders in that any preference, favour, privilege, or immunity granted to the goods of one country must be extended to like goods of all other WTO members. However, Article XXIV exempts the general principle by providing for the establishment of Free Trade Agreements (FTAs) and customs unions under which members may grant preferential treatment to FTA partner products so long as specific requirements are met. GATT Article X also emphasizes the importance of transparency in the administration of trade rules, such as RoO, through its requirement that all trade-related legislation, regulations, and decisions be published and administered uniformly, impartially, and in a reasonable manner.

WTO Agreement on Rules of Origin (ARO)

The WTO Agreement on Rules of Origin (“ARO”), effective as part of the Uruguay Round Agreements since 1995, imposes disciplines on WTO members' use of RoO. Though the ARO is primarily dedicated to non-preferential rules of origin, it lays down relevant principles for interpretation that are also applicable to preferential regimes. The ARO requires RoO not to have restrictive effects on world trade and not to be utilized as instruments to serve ulterior trade policy objectives, ensuring predictability, neutrality and transparency. Article 2 of the ARO requires that RoO not themselves create restrictive, distorting, or disruptive effects on international trade, and that they be administered in a transparent, consistent, and non-discriminatory manner.

While the ARO is not legally binding on preferential RoO, the WTO’s Committee on Rules of Origin has acknowledged that these principles are relevant in assessing domestic origin regimes that affect market access under FTAs. CAROTAR 2020’s requirement for Indian importers to submit documents beyond the CoO, coupled with expansive powers for customs officers to deny benefits, raises legitimate concerns of excess discretion, opacity, and inconsistency with these global best practices.

Legal Analysis of WTO Compatibility

Although no WTO panel has adjudicated a dispute directly involving CAROTAR-like regulations, WTO case law offers interpretive guidance on the limits of unilateralism in administering RoO or preferential schemes. In EC – Tariff Preferences, the Appellate Body held that preference-granting countries cannot arbitrarily impose conditions that undermine the predictability and neutrality of trade preferences. Similarly, in Turkey – Textiles, the Appellate Body emphasized that regional trade agreements cannot be used to justify discriminatory or trade-restrictive measures that are not essential to the formation of such agreements. By analogy, unilateral administrative rules like CAROTAR 2020—which alter the agreed method of verifying origin—may exceed the permissible scope of FTA implementation.

Finally, the WTO Agreement on Technical Barriers to Trade (“TBT Agreement”) requires technical specifications, standards, and conformity assessment procedures, including those for RoO, not to be more than necessary barriers to trade. The measure has to be proportionate to a legitimate objective, i.e., no more trade-restrictive than necessary. CAROTAR's strict compliance regulations, such as extensive documentation requirements, can increase transaction costs and discourage small and medium-sized enterprises from participating. Such needs can also function as non-tariff barriers, being in contravention of the TBT Agreement's principles of necessity and proportionality. Thus, if CAROTAR provisions are stricter than what is necessary to allow adherence to the RoO, they would tend to be incompatible with the TBT Agreement for the regulation of trade barriers.

CAROTAR 2020, however, enables Indian customs authorities to demand additional information directly from importers and deny preferential benefits based on an undefined “reason to believe” without activating the treaty-mandated verification process. This creates a material inconsistency between CAROTAR and India's treaty obligations, potentially contravening the international law principle of pacta sunt servanda, which finds a mention under Article 26 of the Vienna Convention on the Law of Treaties.

One of the main legal issues with CAROTAR 2020 is its consistency with treaty-based rules of origin as promulgated in India's FTAs, such as the ASEAN-India FTA and the India-Korea CEPA. Under such agreements, a CoO issued by the exporting country authority is generally accepted as conclusive origin evidence, subject to being challenged formally under the FTA. CAROTAR, however, imposes an additional burden of documentation on importers to supply detailed supporting documents to substantiate claims. This exceeds tasks outlined in the treaty texts, bypassing the mutual acceptance verification processes agreed.

Another danger is that of arbitrary administrative discretion. The regulations provide authority to customs officers to refuse/suspend PTT if they have "reason to believe" that goods aren’t of the claimed origin. However, the problem arises in how the expression is not clearly defined, and its use is left open to subjective interpretation. In Tata Chemicals Limited v. Commissioner of Customs, the Supreme Court held that expressions often used in statutes, such as "reason to believe", don’t mean subjective satisfaction of the officer concerned and don’t give them arbitrary power; it has to be exercised with restraints imposed by law. Besides, CAROTAR authorizes customs to refuse benefits without following the mutual verification process in the FTAs, which usually involves consultation with the authorities of the exporting country. This can lead to a possible contradiction with the principles of mutual trust and cooperation.

Transparency and due process are also prominent issues under CAROTAR. The rules do not provide clear guidance to importers regarding the documents required, leaving them in doubt. This might be inconsistent with Article X of the GATT 1994, which requires WTO members to make all trade-related rules available and apply them uniformly, non-discriminately, and reasonably. Failure to include clear procedural channels for importers to challenge customs decisions further erodes ‘due process’ and the confidence in customs administration.

Indian Jurisprudence on CAROTAR and Rules of Origin

Emerging Legal Trends from High Courts and CESTAT

Indian courts and tribunals have begun addressing the legal friction between CAROTAR 2020 and India’s commitments under bilateral and regional trade agreements. In particular, they have emphasized the binding nature of treaty-based verification procedures and have cautioned against unilateral administrative measures that bypass such mechanisms. In this regard, some important cases arising out of the High Courts and CESTAT are as follows:

In Trafigura India Private Limited v. Union of India, the customs department retained PTT to imported ingots of tin when it found that the Certificate of Country Origin procured from Trafigura was misleading. The inquiry found discrepancies in the origin documentation; eventually, the merchandise did not meet the RoO requirements under the relevant FTA. The Gujarat High Court held that Trafigura India Private Limited had wrongfully claimed PTT, due to their misleading Certificate of Country Origin and misrepresented Regional Value Content. The case highlights the judiciary's support for rigorous scrutiny and how the courts implement administrative actions intended to deter the misuse of FTAs, particularly in cases involving misdeclaration or insufficient evidence regarding the origin of the goods.

In M.D. Overseas Private Limited v. Union of India & Ors., stress was placed on the rejection of a CoO and the judicial remedy extended to importers. The case illustrates the procedural protection in the Indian legal system, where importers have the right to appeal against customs decisions. The courts, therefore, emphasized the necessity for customs to provide clear, articulated denials of origin claims, leaving importers not remediless. This imposes the principle of due process and openness, balancing strong enforcement with the need for fairness in treating importers while also linking it with the underlying idea of equality as enshrined in Article 14 of the Indian Constitution.

In the judgment given in L R Maurya v. Commissioner of Customs, Bhopal, it was held that the alleged charges of undervaluation and misdeclaration of country of origin regarding the products of the importers were to be set aside subject to a lack of evidence on the part of the concerned department as well as its lack of consonance with law. The appellant was therefore granted consequential relief while the respondent was asked to set aside the differential duty demand, penalties and redemption fine imposed on the appellant. The case is a precedent for stringent sanctions when the authorities attempt to place unnecessary burdens regarding origin requirements, without sufficient grounds/evidence.

Similarly, in Amglo Resources Pvt. Ltd v. Commissioner of Customs, Ahmedabad, as the customs authorities were unable to prove the false origin of the concerned goods or the mens rea of the Appellant in the alleged misdeclaration beyond doubt, the penalties imposed by them were set aside due to lack of evidence.

Together, the above cases reflect a strong judicial trend of how Indian courts are open to the active enforcement of customs under CAROTAR, subject only to procedural justice. The judiciary has shown an inclination towards transparency, ensuring government revenues and the rights of importers are protected.

Legal Doctrines Emerging

Recent rulings and administrative activities have led to the crystallization of some major legal doctrines in India's trade law jurisprudence. Prominent among these is the doctrine of the Supremacy of Treaty Procedure. The courts have held tenaciously that domestic regulations like CAROTAR cannot undermine the agreed verification process under FTAs. If an FTA establishes a specific procedure for verification of origin, Indian officials have to comply. This rule ensures India's compliance with international obligations and safeguards the credibility of treaty-based trade relationships. Therefore, arbitrary administrative actions should not undermine well-negotiated arrangements between FTA partners. The Supreme Court in Gramophone Company of India Ltd. v. Birendra Bahadur Pandey held that in case of conflict between international law and State law, the nations must ‘march with the international community’ and the State law should respect rules of international law and international opinion.

The other key principle is that of prima facie evidence of origin by a CoO. Indian courts have argued that an accurate CoO, when granted by a competent authority, cannot be rejected by customs authorities without substantial grounds. The CoO is intended to provide certainty and facilitate trade, with its evidentiary nature respected unless there are genuine doubts about its authenticity, thus avoiding arbitrariness and upholding the sanctity of the process.

The principles of proportionality and natural justice are also of fundamental concern, especially in the context of post-clearance examination and denial of preferential treatment. The courts have insisted that any measure to impose customs be proportionate to the seriousness of the non-compliance and importers be afforded a reasonable opportunity to appeal against an adverse decision. This will prevent CAROTAR from being unduly punitive and showcase a broader commitment to reconciling rigorous enforcement with importer rights protection.

Recommendations and Policy Reforms

Several policy reforms would make CAROTAR 2020 more equitable while being compliant with India's international obligations. To begin with, there is an urgent requirement to clarify importer obligations by issuing binding circulars or exhaustive FAQs by the Central Board of Indirect Taxes and Customs (“CBIC”). Currently, many importers are unclear about the very documents required to be compliant with the RoO. By issuing clear and openly available guidance, in step-by-step detail, the government can reduce non-compliance and avoid arbitrary enforcement. Another crucial reform is the digital harmonization of the verification of CoO with FTA partner countries. The present verification process could be time-consuming and prone to error/fraud. Through developing interoperable digital platforms to enable real-time, secure exchange of CoO information among FTA partner countries, governments can instantly authenticate the legitimacy and genuineness of CoOs. This would reduce the scope for fraud as well as ease the verification process, raising transparency for all stakeholders involved.

The phrase “reason to believe,” used in Rule 5 of CAROTAR 2020, is susceptible to subjective and inconsistent interpretation. To avoid arbitrary enforcement, detailed guidelines should be issued specifying what constitutes a valid “reason to believe” that origin criteria have not been satisfied. Such guidelines should include objective triggers (e.g., past fraudulent imports from the same exporter, mismatch between declared and observed product characteristics) and should mandate the recording of reasons in writing before initiating denial or verification procedures. This would align the rule with principles of natural justice and administrative transparency, as required under Article X of the GATT.

Another recommendation is the establishment of bilateral verification units tasked with addressing origin verification requests in a time-framed and treaty-consistent manner. Such dedicated units, to be set up in concurrence with major FTA partners, would handle verification queries under procedures and timelines as provided in FTAs. This would encourage mutual confidence and prevent interference with genuine trade. It would also ensure that verification processes comply with treaty commitments, raising the credibility of India's FTA regime.

In order to safeguard the importer's rights and to prioritize treaty procedures, denial should only be permitted in case of a breakdown in cooperation by the partner country or on evidence of conclusive fraud. This would render the enforcement measure proportionate, clear, and consistent with domestic law as well as international commitments. Further, Regular judicial review and administrative audit would ensure that CAROTAR does not exceed the bounds of delegated legislation under Section 28DA of the Customs Act, 1962.

Conclusion

CAROTAR 2020 is a significant step towards improved capacity in India to administer RoO and prevent the misuse of PTT under FTAs. Its application has put an end to long-pending issues, but the efficiency of CAROTAR also relies on a wise balance with India's treaty commitments under WTO disciplines. Recent court decisions have already begun redefining CAROTAR's application, emphasizing the supremacy of treaty-based verification procedures and the requirement of natural justice and proportionality.

This is an important reminder that domestic enforcement mechanisms must remain within the parameters of international law and in the spirit of mutual trust. India must maintain the verification processes embedded in its FTAs, enhance coordination and digital convergence with treaty partners, and prevent unilateral administrative measures that undermine the credibility of its trade regime.

If left unmodified, CAROTAR risks creating uncertainty for importers, inviting litigation, and triggering diplomatic frictions with FTA partners. The way forward lies not in discarding CAROTAR but in refining its implementation to ensure that it is transparent, treaty-consistent, and procedurally fair. With measured reforms—ranging from administrative clarifications to institutional cooperation mechanisms—CAROTAR can evolve into a model framework for balancing trade enforcement with facilitation, fully aligned with WTO principles and India's evolving trade diplomacy.