Rules of Origin (Trade)

Rules of origin are the set of criteria a customs authority applies to determine whether an imported good qualifies as 'originating' in a country with which a preferential trade agreement exists, and is therefore entitled to the agreement's reduced or zero tariff, as opposed to being manufactured elsewhere and merely transhipped through the partner country to capture a preference the true country of manufacture has not negotiated, a practice known as trade deflection. Without rules of origin, a bilateral trade agreement with any single country would, in effect, extend that agreement's benefits to every country the partner itself trades with, defeating the purpose of negotiating bilateral or regional preferences at all. The standard tests used to establish origin include a change in tariff classification, requiring that the finished good fall under a different tariff heading from its imported inputs; a minimum regional value content, requiring that a specified percentage of the good's value be added within the partner country or trading bloc; and, in some sectors such as textiles and chemicals, a specific named manufacturing process that must occur within the partner territory. Agreements typically specify which test, or combination of tests, applies to each product category through detailed product-specific rules. India tightened its origin-verification regime through the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR), framed under Section 28DA of the Customs Act, 1962 and in force from 21 September 2020, which placed a due-diligence obligation on the importer, rather than merely the exporter, to possess documented information establishing that a claimed good genuinely qualifies for preferential treatment, with records to be retained for five years and preferential treatment liable to suspension pending verification. While CAROTAR's anti-deflection purpose is legitimate, the compliance burden it creates, maintaining supplier declarations, audit trails and origin documentation, falls disproportionately on smaller exporters and importers, who often lack dedicated compliance capacity, and is cited as a contributing reason why a substantial share of India's eligible exports do not claim the tariff preferences available to them under its free trade agreements.

• 1 Rules of origin determine whether a good genuinely 'originates' in an FTA partner country and thus qualifies for preferential tariffs.
• 2 Prevent 'trade deflection': routing third-country goods through a partner state to capture an unearned preference.
• 3 Standard tests: change in tariff classification, minimum regional value content, and/or a specific named manufacturing process.
• 4 India's CAROTAR Rules, 2020 (Customs Act, 1962, Section 28DA, in force 21 September 2020) placed origin due-diligence obligations on the importer.
• 5 CAROTAR requires documented origin information, five-year record retention, and allows suspension of preferential treatment pending verification.
• 6 The compliance burden falls disproportionately on smaller exporters/importers lacking dedicated compliance capacity.
• 7 Cited (alongside low awareness and thin preference margins) as a reason only about 20-30 per cent of India's eligible exports claim available FTA preferences, per GTRI (2026).
• 8 Contrasted with partner-country exporters, who reportedly use 60-70 per cent of their preferential access into India.

India's CAROTAR Rules, 2020 were designed to stop third-country goods being routed through FTA partners to claim tariff preferences, but the resulting documentary burden is cited as one reason Indian exporters themselves claim only 20-30 per cent of the preferences their own agreements make available.