Free Trade Agreement (FTA) & Rules of Origin

By Sneha Iyer | Updated March 2026

What Is a Free Trade Agreement and Why Do Rules of Origin Matter?

A Free Trade Agreement (FTA) is a treaty between two or more countries that reduces or eliminates customs duties, import quotas, and other trade barriers on goods and services traded between the signatories. India has signed 14 operational FTAs — including CEPAs (Comprehensive Economic Partnership Agreements), CECAs (Comprehensive Economic Cooperation Agreements), and regional pacts — covering partners from ASEAN to the UAE, Australia, Japan, South Korea, and the EFTA bloc. Three additional FTAs (with the UK, Oman, and New Zealand) were concluded in 2025, and the India-EU FTA was signed on January 27, 2026.

Rules of Origin (RoO) are the criteria that determine the "economic nationality" of a product. Without satisfying RoO, an importer cannot claim the preferential (reduced or zero) duty rate under an FTA. They exist to prevent trade deflection — the practice of routing goods from a non-FTA country through an FTA partner to claim undeserved tariff concessions. For a foreign company exporting to India through an FTA partner, understanding RoO is non-negotiable: get the origin documentation wrong, and full MFN (Most Favoured Nation) duty applies, potentially adding 10-60% to your landed cost.

Legal Basis

• Section 28DA of the Customs Act, 1962 — Inserted by the Finance Act, 2020, this section empowers the Central Government to make rules for administering preferential tariff claims under trade agreements. It places the burden of proof on the importer to demonstrate that goods qualify as originating.
• CAROTAR 2020 (Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020) — Notified on August 21, 2020, effective September 21, 2020. These rules prescribe Form I (importer's self-declaration), verification procedures, and record-keeping requirements (minimum 5 years) for preferential tariff claims.
• Notification No. 14/2025-Customs (N.T.), dated March 18, 2025 — Replaced "Certificate of Origin" with the broader term "Proof of Origin" across CAROTAR, accommodating self-declarations by approved exporters under newer FTAs like India-UAE CEPA and India-Australia ECTA.
• Individual FTA chapters on Rules of Origin — Each FTA has its own RoO chapter specifying product-specific rules (PSRs), value addition thresholds, and certificate/proof of origin procedures.

India's Major Free Trade Agreements

India's FTA network spans 14 operational agreements. The table below lists the key pacts relevant for foreign companies trading with or through India:

Agreements Concluded in 2025-2026

India concluded three additional FTAs in 2025: the India-UK CETA (July 2025), India-Oman CEPA (December 2025, with 98% of Indian exports gaining duty-free access), and India-New Zealand FTA (December 2025, targeting doubled bilateral trade within five years). The India-EU FTA was signed on January 27, 2026, with rules of origin based on self-declaration by exporters.

How Rules of Origin Work

Every FTA defines origin criteria that a product must satisfy to qualify for preferential tariff treatment. The three primary criteria are:

1. Wholly Obtained or Produced

Goods produced entirely within the territory of an FTA partner without any non-originating materials. This applies to natural products — minerals extracted from the soil, agricultural goods grown and harvested, fish caught in territorial waters, and waste derived from production in the exporting country. A coffee shipment grown, harvested, and processed entirely in Vietnam qualifies as wholly obtained under India-ASEAN.

2. Substantial Transformation

Goods manufactured using non-originating (imported) inputs must undergo sufficient processing in the FTA partner country. This is measured through:

• Change in Tariff Classification (CTC) — The finished product must fall under a different tariff heading (at the 4-digit or 6-digit HS code level) than the non-originating inputs. For example, a Change in Tariff Sub-Heading (CTSH) at the 6-digit level is commonly required.
• Regional/Domestic Value Content (RVC/DVC) — The product must achieve a minimum percentage of value addition within the FTA partner country. The threshold varies: India-ASEAN FTA requires 35% domestic value addition, while India-MERCOSUR PTA requires 40%.
• Process-specific rules — Some product-specific rules (PSRs) mandate particular manufacturing steps (e.g., chemical reaction, distillation, assembly) regardless of tariff shift or value content.

3. Cumulation

FTA rules often allow cumulation — treating inputs sourced from other FTA partner countries as originating. Under bilateral cumulation (India-Japan CEPA), Japanese inputs used in India count as Indian-origin when exporting to Japan. Under diagonal or full cumulation (ASEAN), inputs from multiple ASEAN members can be combined to meet the origin threshold.

Certificate and Proof of Origin

To claim preferential tariff rates at the Indian border, the importer must present valid origin documentation. Since the March 2025 amendment to CAROTAR 2020, India recognises two forms:

How to Claim Preferential Tariff Rates

1. Obtain a valid Proof of Origin (CoO or self-declaration) from the exporter before shipment.
2. File the Bill of Entry on ICEGATE, selecting the FTA notification number and entering the CoO details.
3. Submit Form I (CAROTAR 2020) — the importer's self-declaration confirming the goods qualify as originating. This form requires details on how the origin criteria were met (tariff shift, value addition, etc.).
4. Maintain all supporting documents (supplier invoices, BOM, production records) for a minimum of 5 years from the date of filing the Bill of Entry.
5. If customs triggers a verification, respond within the prescribed timeline with supplementary documentation.

Anti-Circumvention Provisions

India has strengthened anti-circumvention measures to combat routing of goods (particularly from China) through FTA partners like ASEAN or the UAE to claim undeserved preferences. Key provisions include:

• CAROTAR 2020, Rule 5 — Customs officers can deny preferential treatment if the importer cannot demonstrate sufficient knowledge of the origin of goods, even if a valid CoO is presented.
• Origin verification requests — Indian customs can request the exporting country's issuing authority to verify the authenticity of a CoO. If no response is received within the prescribed period (typically 6-12 months depending on the FTA), preferential treatment is denied.
• Third-country invoicing scrutiny — When goods are invoiced through a third country (e.g., a Singapore trading company invoicing goods manufactured in Thailand), customs examines whether the goods genuinely originated in the FTA partner.

How This Affects Foreign Investors in India

For foreign companies structuring their India operations, FTAs and RoO create both opportunities and traps:

• Supply chain routing — A European manufacturer exporting to India should evaluate whether routing through an EFTA country (post-TEPA implementation) or using the India-EU FTA (post-2026) yields lower duties than MFN rates under India's customs and GST framework. The choice depends on where substantial transformation occurs.
• Setting up in FTA partner countries — A company manufacturing in Vietnam or Thailand can export to India under the India-ASEAN FTA at preferential rates, provided 35% domestic value addition is achieved. This is a common strategy for companies seeking India market access without manufacturing in India.
• India-UAE CEPA advantages — UAE-based trading companies can benefit from the 97% duty elimination, but only if goods genuinely originate in the UAE. Simply warehousing or relabelling goods in the UAE does not satisfy origin criteria.
• Transfer pricing implications — Intra-group pricing on goods traded under FTA preferences must still satisfy arm's length requirements under Section 92 of the Income Tax Act.

Common Mistakes

• Assuming a valid Certificate of Origin guarantees preferential treatment. Under CAROTAR 2020, Indian customs can — and increasingly does — look behind the CoO. If the importer cannot demonstrate knowledge of the origin criteria (Form I), the preference is denied even with a valid certificate.
• Confusing non-preferential and preferential certificates. A non-preferential CoO from a chamber of commerce is NOT sufficient to claim FTA tariff concessions. Only a preferential CoO from the designated issuing authority (or an approved self-declaration) qualifies.
• Underestimating the value addition threshold. A company that imports 80% of inputs from China, performs minimal assembly in an ASEAN country, and exports to India under India-ASEAN FTA will fail the 35% domestic value content test. Indian customs has been actively targeting such arrangements since CAROTAR 2020.
• Not retaining production and procurement records for 5 years. Compliance calendar discipline is essential: CAROTAR requires importers to maintain supporting documents. During verification, customs demands bills of materials, supplier invoices, and production records — not just the CoO. Companies that cannot produce these face full MFN duty plus interest.
• Ignoring product-specific rules (PSRs). Generic origin criteria (35% value addition) are overridden by PSRs in many FTAs. For example, textiles under India-ASEAN may require a "double transformation" rule (yarn to fabric to garment) regardless of value content.

Practical Example

PrecisionTech Pte Ltd, a Singapore-headquartered electronics firm, manufactures sensor modules in its Thailand factory and exports them to its Indian subsidiary. The sensor modules use imported semiconductors from Taiwan (HS 8541) worth USD 60 per unit and locally procured Thai components worth USD 25 per unit. Assembly, testing, and calibration in Thailand add USD 15 in processing costs. The finished sensor module (HS 9031) is exported to India at FOB USD 120 per unit.

RoO analysis under India-ASEAN FTA:

• Change in Tariff Heading (CTH): The input semiconductors fall under HS 8541; the finished sensor module falls under HS 9031. The 4-digit tariff heading has changed — CTH criterion is satisfied.
• Domestic Value Content: Thai-origin value = USD 25 (components) + USD 15 (processing) = USD 40. DVC = 40/120 = 33.3% — this falls below the 35% threshold.

PrecisionTech has a problem: the CTH test is met, but if Indian customs applies the value addition test (as a co-equal requirement under the applicable PSR), the shipment fails. PrecisionTech must either: (a) increase Thai-origin content by sourcing more components locally (an additional USD 2 per unit shifts DVC to 35%), (b) reclassify the product under a tariff heading where only CTH is required, or (c) forgo FTA preference and pay MFN duty of 7.5% (INR equivalent on USD 120 = approximately INR 900 per unit in additional cost).

Over 50,000 units per year, the cost difference between getting RoO right (zero duty) and paying MFN duty is approximately INR 4.5 crore annually. This is precisely the kind of saving that justifies investing in proper customs and tax registration infrastructure from day one.

Key Takeaways

• India has 14 operational FTAs and concluded 4 more in 2025-2026, covering major trade partners from ASEAN to the EU
• Rules of Origin — not the FTA itself — determine whether your goods actually qualify for preferential duty rates
• The three origin criteria are wholly obtained, substantial transformation (CTH + value addition), and cumulation
• CAROTAR 2020 requires importers to file Form I and maintain origin documentation for 5 years; customs can deny preferences even with a valid CoO if the importer lacks origin knowledge
• India replaced "Certificate of Origin" with "Proof of Origin" in March 2025 to accommodate self-declarations under newer FTAs
• Anti-circumvention enforcement is increasing — especially for goods routed through ASEAN and UAE to avoid MFN duties on Chinese-origin products

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