AEO: the tiers, and what accreditation actually changes

The Indian programme was rebuilt in one instrument. Circular No. 33/2016-Customs dated 22-07-2016 merged the Accredited Client Programme and the earlier Authorized Economic Operator programme into a combined three tier AEO programme, superseding Circular No. 42/2005 dated 24-11-2005 and Circular No. 28/2012-Customs dated 16-11-2012. It was later amended by Circular No. 26/2018-Customs dated 10-08-2018. Three tiers, AEO-T1, AEO-T2 and AEO-T3, cover importers and exporters, and a fourth category, AEO-LO, covers everyone else in the supply chain.

Who can apply, and what is the real threshold?

Lower than most people assume. Paragraph 3.1.7 of Circular No. 33/2016-Customs records that, keeping small and medium scale enterprises in mind, the programme is open to all importers and exporters whose threshold of import or export declarations is 25 documents, that is either bills of entry or shipping bills, during the last financial year. Paragraph 3.1.6 requires business activities for at least three financial years preceding the date of application, with a discretion for the AEO Programme Manager to consider a newly established entity on physical verification of internal controls.

Three structural rules catch people out. Paragraph 3.1.3 provides that the application covers only the legal entity of the applicant and does not automatically apply to a group of companies. Paragraph 3.1.4 provides that there is no provision to grant AEO status to a specific site, division or branch, and that the application must cover all activities and locations of the legal entity in the international supply chain. Paragraph 3.1.8 provides that status granted to a customs broker does not confer similar status on its client importers or exporters, who must apply separately.

What disqualifies an applicant before anything else?

The compliance history, and it is tested over three years. Paragraph 3.2.1 requires that there should be no show cause notice issued during the last three financial years involving fraud, forgery, outright smuggling, clandestine removal of excisable goods, or cases where tax was collected from customers but not deposited. Paragraph 3.2.2 requires that there should be no case where prosecution has been launched or is being contemplated against the applicant or its senior management.

Paragraph 3.2.3 sets a numeric test for everything else: if the ratio of disputed duty or drawback demanded, in all show cause notices issued under the Customs Act, 1962 other than those above during the last three financial years, to the total duty paid and drawback claimed during that period is more than ten percent, a review is taken of the nature of the cases and a decision made on issue or continuance of status. An explanation excludes notices dropped or decided in the applicant's favour. Paragraph 3.2.4 additionally requires the applicant to demonstrate procedures to identify and disclose irregularities and to have taken remedial action.

Which benefits are procedural?

Most of the T1 list. Paragraph 1.5.1 of Circular No. 33/2016-Customs gives AEO-T1 a high level of facilitation, Direct Port Delivery of import containers and Direct Port Entry of export containers subject to trade volume, identity cards for authorised personnel, on-site post clearance audit once in two years instead of regular transactional audit, an email on arrival and departure of the vessel, and 24 by 7 clearance on request at all seaports and airports with no merchant overtime fee.

Paragraph 1.5.2 adds, over and above T1, that for importers and exporters not opting for direct port movement, seal verification and scrutiny of documents by customs officers would be waived and consignments given out of charge or let export order without scrutiny; priority scanning; self-sealing of export goods without case to case permission; faster completion of Special Valuation Branch proceedings; paperless declarations with no supporting documents in physical form; on-site post clearance audit once in three years; and a Client Relationship Manager at Deputy or Assistant Commissioner level as a single point of interaction. Paragraph 1.5.3 gives AEO-T3 containers that are not selected for scanning except on specific intelligence, reliance on self-certified copies without insisting on originals, and on-site inspection on request.

Which benefits are financial, and how much?

Four, and they are the reason the programme is worth the effort. On bank guarantees, paragraph 1.5.1(v) provides that where an AEO-T1 is required to furnish a bank guarantee, the quantum would be 50 percent of that required from a non-AEO; paragraph 1.5.2(ix) puts AEO-T2 at 25 percent; and paragraph 1.5.3(iv) provides that AEO-T3 would not be required to furnish any bank guarantee. All three carry the same exception: the relief does not apply where the competent authority orders a bank guarantee for provisional release of seized goods.

On refunds, paragraph 1.5.2(xv) provides that refund or rebate of customs and central excise duty and service tax would be granted within 45 days of submission of complete documents for AEO-T2, and paragraph 1.5.3(vii) reduces that to 30 days for AEO-T3. Paragraph 1.5.2(v) provides for faster disbursal of drawback within 72 hours of EGM submission from a date to be notified. And paragraph 1.5.2(iv) provides the facility of deferred payment of duty, which is the largest of the four.

How does deferred duty payment actually work?

By separating clearance from payment. CBIC's FAQ on deferred duty payment describes it as a mechanism for delinking duty payment and customs clearance based on the principle clear first, pay later, records that the Deferred Payment of Import Duty Rules, 2016 were notified by Notification No. 134/2016-Customs (N.T.) and No. 135/2016-Customs (N.T.), both dated 02-11-2016, and that the scheme is in force with effect from 16-11-2016. The FAQ records that the benefit is extended to importers holding AEO-T2 or T-3 status, that the importer indicates the intent using flag D in the payment method column of each bill of entry, and that a nodal person authenticates it through the ICEGATE login with a one time password before clearance is given.

The due dates sit in rule 5, and they were substituted. Public Notice No. 27/2019 dated 15-03-2019 of Jawaharlal Nehru Custom House reproduces the Deferred Payment of Import Duty (Amendment) Rules, 2017, which substitute clauses (a) to (d) of rule 5 so that duty for a bill of entry returned for payment from the 1st to the 15th day of a month is paid by the 16th of that month, from the 16th to the last day of any month other than March by the 1st day of the following month, and from the 16th to the 31st day of March by 31 March. The FAQ records the consequences of missing them: interest becomes due, the miss counts as a default, and on a subsequent default the AEO reverts to transaction-wise payment, with restoration only after ninety days of the last but one default and payment of all dues.

What does the application genuinely cost in effort?

More than a form, and the circular is honest about it. Paragraph 2.1 of Circular No. 33/2016-Customs lists ten annexures. An AEO-T1 applicant files Annexure A, the application form, Annexure C, a process map, Annexure D, a site plan, and self-assessment annexures E.1 general compliance, E.2 legal compliance, E.3 managing commercial and where appropriate transport records, and E.4 financial solvency. AEO-T2 and AEO-LO add Annexure B, a security plan, and Annexure E.5, safety and security, which itself runs to seven parts, E.5.1 to E.5.7. AEO-T3 adds Annexure F, business partner details.

Paragraph 3.1.9 records that the eligibility conditions are the same regardless of size, but that the AEO Programme Manager shall take due account of the specific characteristics of micro, small and medium enterprises when applying the records and the safety and security criteria, taking into account size, legal status, structure, key business partners and economic activity, with a view to making the certificates more available to them. That is a real accommodation, and it is not a waiver.

How long does it take, and how long does it last?

The circular sets both. Paragraph 4.4.4 provides that an AEO-T1 applicant meeting the conditions shall be issued the certificate within 30 days of submission of the information or documents. For AEO-T2 and AEO-LO, paragraph 4.4.5 provides for intimation within 30 days, assignment to an AEO Programme Team within 15 days for physical verification, a visit within 90 days under paragraph 4.4.5.1, a report and recommendation within 60 days of completion of visits under paragraph 4.4.5.9, and issue of the certificate within 30 days of that recommendation under paragraph 4.4.5.10. Paragraph 4.4.8 provides that an AEO-T2 holder of two years or more applying for T3 shall be issued the certificate within 30 days. Paragraph 4.3 requires rejection to be communicated within 30 days of receipt.

Paragraph 5.1 provides that the validity of the certificate shall be two years for AEO-T1, three years for AEO-T2, and five years for AEO-T3 and AEO-LO. Paragraph 5.2.1 requires renewal applications 30 days before lapse for T1, 60 for T2 and 90 for T3 and LO. Paragraph 5.3.3 requires notification of any significant change in business or processes as soon as it is known, or at least within 14 days, and paragraph 5.3.4 requires a fresh application in the new name if the legal entity changes.

When is it worth it, and when is it not?

It is worth it when duty outflow is large enough that deferring it to a fixed monthly date changes working capital, or when bank guarantees are a standing cost, and when the compliance history in paragraph 3.2 is clean enough to survive a three year look back. It is not worth it when the volume is near the 25 document floor and the benefit is only faster clearance, because that benefit is real but small against the effort of a security plan, a site plan and a seven part self-assessment.

The risk side is also real. Paragraph 5.5.2 provides that where a show cause notice is issued alleging infringement, other than the fraud category, the AEO Programme Manager may downgrade a T3 to T2 or T1, downgrade a T2 to T1, or suspend the status. Accreditation is therefore a standard to be maintained rather than a certificate to be filed, and the internal record keeping it asks for is the same record keeping that keeps an entry defensible in the first place, which is the argument half of India's bills of entry get amended makes from the other direction. Purser keeps that record: it never submits to a government portal, and it never sends an outbound message without a recorded human approval event.

Where to go from here

Accreditation changes the cost of the same operation, so it belongs beside the pieces that price that operation.

• What late filing costs without it. Bill of entry late filing charges puts a figure on the timing risk the programme reduces.
• Where duty sits in the sequence. Import duty, the order of operations shows what deferred payment is actually deferring.
• The remedy that no tier removes. Anti-dumping duty attaches to a producer covers the levy that facilitation does not touch.
• The amendment problem underneath. Half of India's bills of entry get amended explains why internal controls are the real qualification.

Frequently asked questions

What is the minimum trade volume to apply for AEO status in India?

Twenty five documents in a financial year. Paragraph 3.1.7 of Circular No. 33/2016-Customs dated 22-07-2016 records that, keeping small and medium scale enterprises in mind, the programme is open to all importers and exporters whose threshold of import or export declarations is 25 documents, that is either bills of entry or shipping bills, during the last financial year, and that other economic operators should have handled at least 25 such documents. Paragraph 3.1.6 separately requires business activities for at least three financial years preceding the application.

Which AEO tier gives deferred payment of customs duty?

AEO-T2 and above. Paragraph 1.5.2(iv) of Circular No. 33/2016-Customs provides the facility of deferred payment of duty to AEO-T2 from a date to be notified, and CBIC's FAQ on deferred duty payment records that the benefit is currently extended to importers holding AEO T-2 or T-3 status. The Deferred Payment of Import Duty Rules, 2016 were notified by Notification No. 134/2016-Customs (N.T.) and No. 135/2016-Customs (N.T.), both dated 02-11-2016, and the scheme is in force with effect from 16-11-2016.

How much does AEO status reduce a bank guarantee?

By half at T1 and to a quarter at T2, with full waiver at T3. Paragraph 1.5.1(v) of Circular No. 33/2016-Customs provides that where an AEO-T1 is required to furnish a bank guarantee the quantum would be 50 percent of that required from a non-AEO, paragraph 1.5.2(ix) puts AEO-T2 at 25 percent, and paragraph 1.5.3(iv) provides that AEO-T3 would not be required to furnish any bank guarantee. In each case the relief does not apply where the competent authority orders a bank guarantee for provisional release of seized goods.

How long is an AEO certificate valid in India?

It depends on the tier. Paragraph 5.1 of Circular No. 33/2016-Customs dated 22-07-2016 provides that the validity shall be two years for AEO-T1, three years for AEO-T2, and five years for AEO-T3 and AEO-LO. Paragraph 5.2.1 requires the renewal application to be submitted before lapse of validity, 30 days ahead for AEO-T1, 60 days for AEO-T2, and 90 days for AEO-T3 and AEO-LO.

Can AEO status be downgraded or suspended?

Yes, and on a show cause notice rather than a conviction. Paragraph 5.5.2 of Circular No. 33/2016-Customs provides that in the case of an AEO importer or exporter, if any show cause notice is issued alleging infringement other than those covered by paragraph 3.2.1, the AEO Programme Manager may downgrade an AEO-T3 to AEO-T2 or AEO-T1, downgrade an AEO-T2 to AEO-T1, or suspend the status, after due diligence and careful evaluation of the material evidence. Paragraph 5.5.1 also allows suspension where non-compliance with the conditions or criteria is detected.