Will Budget 2026 synchronise Customs law with India's FTA ambitions?

Customs regimes can lead to labyrinthine legal disputes. Budget 2026 must recognise that an excessively defensive Customs posture can itself become a trade barrier

“Trade is not a zero-sum game, but its administration often is.” This adage captures the current tension at India’s Customs borders. As India pivots its trade towards a new generation of future-fit alliances through Free Trade Agreements (FTAs), a paradox has emerged. While the ministry of commerce negotiates the red carpet of market access, the ministry of finance is not aligned with enforcement. The challenge for the upcoming Budget is to transition towards strategic facilitation and ensure that trade facilitation measures through FTAs are not a legal fiction, but an economic reality.

 

Customs law: Gatekeeper to free trade 

The legal nexus between customs law and FTAs is inherently precarious. Customs law acts like the gatekeeper of free trade since it regulates the import and export of goods. FTAs, on the other hand, are negotiated exceptions to the World Trade Organization’s most-favoured-nation (MFN) rule, which is found in Article XXIV of the General Agreement on Tariffs and Trade. 

FTAs let States give preferential tariff treatment to treaty partners while keeping normal tariff rates for others. The interface between the two is more operational than conceptual. A complicated set of subordinate laws makes FTAs work by giving customs officials the power to decide treaty eligibility. This creates a structural duality in which the Customs administration has to balance revenue mobilisation efforts with trade propulsion measures. As a result, Customs regimes lead to labyrinthine legal disputes, where giving someone a tariff preference is no longer a ministerial act but a strict process for assimilating evidence. 

 

Rules of Origin: A regulatory bottleneck 

In the context of implementation and operationalisation of FTAs, a major pushback comes from rules of origin (ROO). ROO are a set of procedural measures to determine the economic nationality of a product. In the past, India faced issues with regional trade agreements in South-East Asia because of trade deflection, which is when goods from other countries were slightly processed to claim the benefit of FTAs. To counter this, India put in place the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR) to protect the economy from this kind of circumvention. This framework juxtaposed the conventional trust-based model of international trade by transferring the burden of proof from the exporting sovereign to the importer. By requiring importers to have detailed information about the cost structures and manufacturing processes of their foreign suppliers, CAROTAR changed the Certificate of Origin (CoO) from a definitive shield into a convoluted compliance burden. 

These rules have given rise to legal controversies, while undermining India’s larger FTA objectives. Agreements with ASEAN (Association of South East Asian Nations), South Korea and Japan were expected to integrate India more deeply into regional value chains, yet utilisation rates have remained uneven. However, recurring issues over origin of goods have resulted in wide scepticism, with many domestic businesses now questioning whether FTAs truly benefitted trade. The information requirements cut deep into suppliers’ cost structures, and processes have raised concerns on proportionality, predictability and ease of compliance, militating against the principle of mutual trust and cooperation between customs administrations. As a result, CAROTAR has become a critical instrument shaping how FTAs are experienced in practice, often determining whether preferential access is effectively usable by trade.

 

Impact of CAROTAR on FTAs 

In practical terms, CAROTAR has had a dampening effect on FTAs’ utilisation, particularly for sectors with complex or multi-country supply chains. Importers increasingly face uncertainty regarding post-clearance audits, retrospective denial of benefits, and extended verification timelines. 

Often, cases have landed up in courts. Post-clearance audits have become more frequent, with benefits sometimes denied retrospectively. Verification timelines often stretch far beyond what businesses can reasonably plan for. In response, many companies are shifting into a defensive mode. Some are redesigning supply chains simply to make origin compliance easier and some businesses now choose to pay MFN duties to avoid risk of disruption. The burden is felt most acutely by micro, small and medium enterprises, which lack the leverage to obtain detailed origin data from overseas suppliers. 

CAROTAR is a conscious policy reset aimed at curbing trade deflection and circumvention, which have often bothered India’s policymakers. Tighter origin enforcement seeks to ensure that tariff concessions are not exploited through third-country trades. No doubt, the objective is legitimate and necessary. However, it must be remembered that FTAs are political and strategic bargains, and not merely tools for tax collection. 

When CAROTAR is applied with excessive rigidity, it weakens commercial confidence and dilutes the strategic value of trade commitments.

 

QCOs: A double whammy  

  Beyond the complex maze of country-of-origin disputes, another nadir has emerged in the form of quality control orders (QCOs). Issued under the Bureau of Indian Standards (BIS) framework, QCOs are increasingly functioning as non-tariff impediments to the Indian market. In principle, they promote safety, quality and environmental protection. In practice, they often dilute the very trade liberalisation that FTAs seek to achieve. A product may successfully clear the CAROTAR origin threshold and still remain stranded at the port, because the required BIS certification cannot be issued by foreign laboratories that lack Indian accreditation.

This creates a regulatory double whammy for importers. Compliance is achieved on paper but defeated in execution. If left unaddressed, such tensions risk turning India’s borders into a holding zone for preferential trade, where tariff concessions negotiated through diplomacy are effectively neutralised by the operational rigidity of technical standards. The challenge is no longer just about lowering duties — it is about aligning regulatory architecture with India’s trade ambitions in a manner that preserves both safety objectives and commercial certainty.

 

Budget: Converting bottleneck to bridge 

The upcoming fiscal document must recognise that an excessively defensive Customs posture can itself become a trade barrier. Revenue protection is a legitimate sovereign interest, but it should not come at the cost of commercial paralysis. 

If the Budget can successfully bridge the gap between revenue protection and trade facilitation, it will do more than merely collect duties – it will provide the institutional bedrock required for India to integrate meaningfully into the global economic architecture.

 

Mukesh Butani is the managing partner, while Shankey Agrawal is a partner with the indirect tax, trade & customs team at BMR Legal Advocates. Assisted by Harsh Shukla (counsel) and Nitin Dhatarwal (associate)