Tweaks to pact with S. Korea mooted:

Tweaks to pact with S. Korea mooted:

Context

• 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.

What is the issue?

• There is a probability of ‘criminal angle’ behind the recent rapid rise in imports of the yellow metal from South Korea.

What is the reason behind the rise?

• The rise is due to certain firms, ‘owned and operated by some Indians’, allegedly misusing the India-South Korea FTA that allows duty-free import of the precious metal and its articles.

Is GST the cause behind it?

• With the Gold imports from South Korea shooting up to $340, the implementation of the Good and Services Tax (GST) from July 1 led to the import surge.

What was the previous way of functioning?

• Pre-GST, 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, the FTA thus eliminating the customs duty on gold imports.
• Under the new tax regime, a 3% GST replaced the CVD.

What does this replacement mean?

• This meant gold imports from the non-FTA route attracted 10% BCD and 3% GST, while those from the South Korea FTA channel paid only 3% GST, which could be later claimed as input tax credit.

Why the issue of criminal angle?

• The authorities 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, violating FTA norms.
• Under the FTA, duty-free import of gold medallion into India is currently allowed only if it has met the norm of ‘Change in Tariff Heading’ under the Harmonized System Code.

What does Change in Tariff Heading means?

• This means one could send gold bars and rods from a third country to South Korea, convert them into medallion there, export to India and avail the zero-duty benefit.
• Though the Centre had last month ‘restricted’ imports of jewellery, precious metal and related items from South Korea, official sources said it was only a temporary measure.

Conclusion

• In an upcoming trade meeting with South Korea, India will push for inclusion of tighter norms in the FTA on imports of gold and its items to prevent misuse.
• India will insist on a clause in the FTA specifying the criteria of (at least 35%) ‘value addition’ as well as ‘Change in Tariff Sub-Heading’ to ensure that the item has undergone substantial transformation in South Korea.
• Only those furnishing the required certificate, stating the criteria have been met, will be allowed FTA benefits.