India is looking to plug loopholes in its Free Trade Agreement (FTA) with South Korea following concerns over a recent sudden surge in imports of gold and related articles from that country. Authorities are also learnt to be probing a possible “criminal angle” behind the recent rapid rise in imports of the yellow metal from South Korea, official sources told The Hindu.
The incident happened due to certain firms, “owned and operated by some Indians”, allegedly misusing the India-South Korea FTA — officially called the Comprehensive Economic Partnership Agreement (CEPA) — that allows duty-free imports of the precious metal and its articles.
Gold imports from South Korea had shot up to around $340 million during July 1-August 3, 2017, while the same for the entire 2016-17 was just about $71 million. The implementation of the Good and Services Tax (GST) regime from July 1 was the main factor that led to the import surge. In the pre-GST regime, gold imports through the non-FTA channel attracted a 10% Basic Customs Duty (BCD) and an additional 12.5% countervailing duty (CVD), while those from the FTA route were levied a 12.5% CVD (as the FTA eliminated the BCD on gold imports) — which had discouraged such gold imports. Post-GST, the CVD was replaced by a 3% GST. This meant, gold imports from the non-FTA route attracted a 10% BCD and a 3% GST, while those from the (South Korea) FTA channel had to pay only the 3% GST — which they could later claim as Input Tax Credit (in effect, imports with no duties).
What also raised eyebrows was that South Korea is not among the world’s leading producers or exporters of gold and its items.
Significantly, the authorities, therefore, are examining a possible criminal angle in such transactions as those entities were allegedly sending gold medallion directly from Dubai to South Korea and then exporting to India, in violation of the FTA norms. Currently, under the FTA, duty-free import of gold medallion is allowed only if it has met the norm of 'Change in Tariff Heading' under the Harmonised System (HS) Code — which means one could send gold bars and rods from a third country to South Korea, convert them into medallion (thereby changing the tariff line due to some transformation) there, then export to India and avail the zero-duty benefit.
While the government had last month 'restricted' imports of jewellery articles, precious metal and related items from South Korea, official sources said it was only a temporary measure. “Where there is an FTA (with a country), banning imports (of any item) is not a courteous exercise,” an official said.
They said, therefore, in the bilateral meeting to be held soon with South Korea on trade issues, India will, as a long-lasting measure, push for inclusion of tighter norms in the FTA on imports of gold and its items, to prevent misuse.
India will insist on incorporating a clause in the FTA specifying the criteria of (at least 35%) 'value addition' as well as ‘Change in Tariff Sub-Heading’ (under the Harmonised System Code) to ensure that the item has undergone substantial transformation in South Korea, and not just routed through that country to take advantage of the duty-free norms under the FTA. Only those furnishing the required certificate — stating that the criteria have been met — will be given the FTA benefits. Else, such imports from South Korea will attract the usual 10% duty, the sources said. Since gold is a sensitive item for India (with India being the world’s second largest consumer of the commodity), the other plan is to shift gold and articles to the negative list (meaning attracting the same duties for normal imports, and without any duty benefits) in the FTA.
Simultaneously, there are also plans to impose safeguard duty (of around 12.5%) on gold imports from South Korea. In order to carry out investigations for imposing the safeguard duty on imports from South Korea — that is an FTA-partner country, the government had last month brought out a new set of rules called the India-Korea CEPA (Bilateral Safeguard Measures) Rules, 2017. As per the rules, the objective of the investigation is “to determine the existence of serious injury or threat of serious injury to the domestic industry, caused by the increased imports of an originating good as a result of the reduction or elimination of customs duty under the Trade Agreement.”
