India-Korea CEPA 2.0 (2026): Supply Chain Structuring, Rules Of Origin, Customs Duty Planning, And Audit Defence For Korean Companies

India and Korea commence 2026 amidst intensified trade enforcement, realignment of supply chains, and ongoing negotiations for the upgrade of the CEPA. Eight rounds of discussions have been completed, with both governments indicating a formal commitment to rebalancing the agreement. Various Korean entities, including Hyundai Motor, LG Electronics, industrial manufacturers, and renewable energy firms, are broadening their operations in India across sectors such as electronics, EV components, chemicals, and green energy.

Concurrently, India is tightening its customs regulations: notifications issued in March and April 2025 have replaced the limited certificate of origin model with a more comprehensive proof of origin standard under CAROTAR rules, customs has enhanced its post-clearance verification authority, and new voluntary revision mechanisms under Section 18A now promote proactive disclosure prior to the commencement of audits. India's trade deficit with Korea has expanded from USD 9.4 billion in FY2022 to USD 14.7 billion in FY2024, with a decline in Indian exports and a surge in Korean imports.

The CEPA 2.0 will not simply modify tariff rates; it will transform the manner in which Korean companies organize their supply chains, document origin, plan duties, and manage audits in India. This evolution transcends the mere acquisition of preferential access through compliance driven by certificates. It is fundamentally about establishing legal defensibility from the very first invoice.

The operating model of Korean conglomerates increases early-stage compliance risks. Major Korean companies usually consolidate procurement, pricing, and supplier management at headquarters (instead of in local subsidiaries), meaning that sourcing, contract terms, and invoice structures are established before teams in India conduct origin defensibility checks; a sequence that solidifies ROO and valuation risk upstream.

This is important because CEPA 2.0 and India's post-clearance regulations demand real-time, detailed BOMs, supplier statements, and cost documents at the time of import; when these business choices are already integrated into group ERP and primary sourcing contracts, correcting issues afterwards becomes expensive and frequently unproductive. In empirical studies, Korea's industrial framework of favouring integrated group supply chains and centralized procurement has been extensively recorded in the literature regarding Korean business conglomerates and industrial strategy, validating that centrally made decisions can significantly impact compliance in far-off regions.

CEPA 2.0 in 2026: Why Korean Companies Must Look Beyond Tariff Benefits

Discussions regarding the CEPA upgrade are influenced by three primary factors: India's ongoing trade deficit with Korea, the need to mitigate FTA misuse (especially concerning third-country routing from China via ASEAN), and the alignment with India's broader FTA recalibration as evidenced by recent agreements with the UAE and Oman.

In September 2024, Commerce Minister Piyush Goyal and his Korean counterpart, Inkyo Cheong, convened to deliberate on achieving balanced trade, enhancing CEPA, and tackling non-tariff barriers. Furthermore, Korea's Trade Minister engaged with India's new ambassador in December 2025, committing to the prompt resumption of negotiations. It is important to note that these discussions are not merely exploratory; they represent formal governmental interactions with institutional momentum. Korean enterprises should prepare for more stringent Rules of Origin (ROO) thresholds, broadened product- specific regulations, strengthened verification authority for Indian Customs, and heightened collaboration between Korean and Indian customs agencies.

A crucial point for practitioners to consider is that CEPA 2.0 is expected to condition preferential access on demonstrable economic substance rather than solely on compliance with certification. The previous approach allowed for claiming duty benefits with subsequent management; however, the 2026 framework emphasizes establishing structure first, followed by claims later.

Supply Chain Structuring: How Korean Groups Should Rebuild Korea to India Trade Models

When evaluating the benefits of CEPA against compliance risks, Korean entities encounter three structural options. Each option necessitates distinct documentation and presents varying levels of exposure:

1. Direct Export from Korea to India

This represents the most straightforward commercial flow with HS continuity. The associated risks encompass classification difficulties, scrutiny of valuation concerning intercompany pricing, and exposure to ROO compliance. Indian Customs now anticipates arm's-length benchmarking that aligns with customs regulations (not merely transfer pricing documentation), origin mapping at the component level, and contemporaneous cost sheets that link supplier costs to BOM lines. To mitigate these risks, pre-import HS validation through advance rulings should be pursued where possible, along with explicit supplier declarations outlining processing steps, and ensuring that intercompany invoices are consistent with India's valuation criteria (royalties, license fees, and post-sale proceeds may be included under valuation regulations).

2. Multi-Country Routing

Numerous Korean companies utilize routing through ASEAN for logistical purposes or to leverage other FTAs. Indian Customs is now actively investigating "substantial transformation" and is rejecting routing that is merely cosmetic. Notification 14/2025 and CBIC Circular 14/2025 explicitly authorize officers to request additional documentation beyond the conventional certificates of origin. To maintain preferential claims, businesses must keep manufacturing flow charts, calculate regional value content, and retain production records that demonstrate genuine transformation. This is not a theoretical concern - customs has identified repeated misuse of FTA routes for goods of Chinese origin routed through ASEAN, particularly in the textiles, electronics, and steel sectors. Companies that depend on third-country routing without actual transformation risk losing CEPA benefits and facing retrospective duty assessments. The documentary requirements are no longer optional.

Routing through ASEAN is a common and cost-effective commercial choice for many Korean groups, but India's enforcement focus on anti-circumvention and "substantial transformation" now places many minimal-processing models at high risk. Recent CBIC guidance and origin verifications emphasize that superficial operations in third countries (labelling, repacking, trivial assembly) will not substantiate origin where major inputs originate elsewhere; customs agencies are coordinating anti-circumvention and verification work across borders to detect cosmetic routing.

For Korean exporters that rely on ASEAN transshipment or limited processing to access preferential rates, a product-level ROO gap assessment is essential, documenting actual transformation, performing regional value-content calculations at BOM line level, and identifying where minimal processing must be replaced with demonstrable manufacturing steps or abandoned in favor of direct export or India-based assembly.

Failure to reassess routing strategies in light of these developments invites retrospective denial of origin and significant duty adjustment.

3. India-Centric Manufacturing / Assembly

Moving assembly to India unlocks localization benefits but introduces duty-inversion risks (imported components may attract higher duty than finished goods), GST compliance complexity, and local content obligations. Use bonded warehousing, EPCG (Export Promotion Capital Goods), or FTWZ (Free Trade Warehousing Zone) structures where appropriate, but assess total landed cost after compliance overheads. Indian incentives help only if customs, GST, and compliance costs are modeled together not separately. Local sourcing needs supplier qualification processes that feed into origin and audit files. Decision rule: choose the model that minimizes total economic cost after factoring probable audit adjustments and documentary compliance cost, not simply the headline duty rate.

Rules of Origin: The Single Biggest CEPA Risk Area for Korean Exporters

CEPA 2.0 is anticipated to strengthen ROO thresholds and broaden product-specific regulations. India's transition in March 2025 from "certificate" to "proof" of origin signifies this policy shift - customs officials will require documentary evidence beyond a mere signed certificate. Notification 14/2025-Customs (N.T.) issued on March 18, 2025, has replaced the terminology throughout all CAROTAR provisions. The CBIC Circular 14/2025 released on April 21, 2025, clarified that "proof of origin" now encompasses both certificates provided by designated authorities and self-declarations from qualified exporters.

The transition from "certificate" to "proof" of origin is not mere administrative terminology; it places the evidentiary responsibility directly on importers and their suppliers in Korea. The amendments in India for March-April 2025 define "proof of origin" to encompass both certificates from issuing authorities and self- declarations; however, Customs' guidance and developing practices emphasize that self-declarations must have audit-ready support (such as BOM mapping, current cost sheets, detailed supplier process statements, and preserved production records).

In reality, exporters viewing self-declaration as merely a way to reduce paperwork will discover that Indian officials require supporting cost and process documentation during post-clearance checks, and without such evidence, preferential claims may be halted or rejected. For Korean organizations that depend on standardized self-reports among affiliates, this entails identifying origin-owners, maintaining primary source documentation at the supplier level, and synchronizing ERP invoicing fields to the documentary requirements outlined by CBIC.

Common origin failures observed in recent Indian practices include discrepancies in HS classification between supplier and importer documentation; lack of back-to-back supplier declarations; dependence on minimal processing in a third country to assert substantial transformation; and absence of contemporaneous cost evidence to support regional value content. Each of these failures results in a retrospective duty liability.

The verification processes that can be anticipated include post-clearance ROO inquiries directed through the Directorate of International Customs (DIC) FTA Cell; requests for foreign verification to Korean authorities; suspension of preferential benefits pending verification; and retrospective denial of benefits along with interest and penalties in cases of mis-claims. According to CAROTAR regulations, Indian Customs has the authority to verify origin through partner country authorities, and importers are required to respond within shortened timelines.

Customs Duty Planning in 2026: From Rate Comparison to Litigation Avoidance

Previously, CEPA planning primarily involved a straightforward comparison between MFN and CEPA rates. Currently, it encompasses tariff rationalization, adjustments in sectoral duties (notably in electronics, renewables, and chemicals, all of which experienced changes in Budget 2025-26), along with increased scrutiny of exemptions. Duty planning must be approached as an integrated process, where classification, valuation, origin, and contract design are interdependent.

1. Classification Strategy

Pursue advance rulings in cases where ambiguity in HS codes results in significant duty differentials. Ensure consistency in global HS positions while being prepared to articulate both commercial and technical justifications to Indian Customs. Discrepancies in classification across different jurisdictions can lead to challenges.

2. Valuation Strategy

India's customs valuation framework mandates the inclusion of royalties, license fees, and specific after- sale payments that pertain to the goods. For imports involving related parties, contemporaneous transfer- pricing documentation must align with customs positions; any inconsistencies can result in substantial reassessments. It is essential to maintain signed agreements that outline payment terms and the economic rationale behind related-party charges. When intra-group pricing is applied, treat customs valuation and transfer pricing as a unified compliance task rather than separate workstreams.

3. Import Architecture

Implement bonded warehousing or staged clearance for high-value components to defer duties and mitigate risks. Explore voluntary revision mechanisms under Section 18A (introduced through Section 93 of the Finance Act 2025, effective from November 1, 2025, via Notification 70/2025) as a proactive compliance strategy when minor errors are identified post-clearance. CBIC Circular 26/2025 offers comprehensive guidelines: importers may voluntarily disclose material facts and remit duties with interest, but without incurring penalties, provided that customs audits, searches, or investigations have not been initiated.

This represents a trust-based compliance approach. Engaging in duty optimization without a compliance framework can lead directly to litigation. It is advisable to model a worst-case scenario for retrospective duty adjustments within your project economics - should the project remain viable.

Audit Defence: Preparing for India's Post-Clearance Enforcement Environment

India's enforcement practices are becoming increasingly retrospective. Post-clearance reviews, origin verifications, valuation audits, and coordinated investigations involving Customs, the Directorate of Revenue Intelligence (DRI), and GST authorities can extend back over multiple financial years. Audits frequently necessitate documentation covering a span of 5 to 7 years. Common triggers for these audits include imports between related parties, CEPA claims, shifts in classification, and high-value electronics and components.

Korean firms are particularly sensitive to multi-year retrospective exposure, and organisational habits make that exposure worse. Empirically, India's post-clearance and ROO verifications routinely extend multiple fiscal years; where initial desk queries are treated locally as routine, the delay in HQ-level escalation frequently leads to incomplete document collection, misaligned transfer-pricing vs customs positions, and missed opportunities to use voluntary revision routes.

The practical implication is simple: treat an origin or valuation query as potential litigation from day one, trigger HQ legal-forensic validation immediately, and preserve full supplier records and contemporaneous cost analytics to avoid escalation into interest, penalties or criminal referrals. This procedural change materially reduces downside: early coordination converts a reactive remediation into a controlled voluntary revision under Section 18A (where appropriate), rather than a retrospective enforcement contest.

Audit Readiness Framework

Upon receiving an inquiry: respond promptly, compile the complete origin/valuation documentation, and contemplate voluntary revision under Section 18A when appropriate. Proactive factual transparency combined with clear legal positions diminishes the likelihood of criminal referral and often reduces potential penalty exposure. Companies that regard summons as mere bureaucratic nuisances rather than as early- stage litigation tend to incur significant costs due to this misjudgment.

What Korean Companies Should Do Now

• Conduct CEPA exposure review for all India-bound Map SKUs to a CEPA exposure register showing current duty treatment, origin claims, and compliance gaps.
• Validate ROO eligibility at component Run product-level ROO eligibility tests with documented BOMs and cost breakdowns.
• Build origin defence files in Create CEPA origin defence files before claiming preferential duty - reactive assembly during audit is too late.
• Align transfer pricing and customs valuation Update intercompany agreements to ensure transfer pricing documentation supports customs valuation positions.
• Review supply chain routing for anti-circumvention Reassess third-country routing strategies - remove hollow routing that lacks true transformation before Indian Customs flags it.
• Prepare audit response protocols. Institute SOPs, escalation matrices, and centralized document retention systems.
• Train India procurement and logistics teams on CEPA documentation. Front-line staff must understand what constitutes compliant origin evidence - errors at invoice level become litigation three years later.

India-Korea trade is entering a compliance-first phase. The companies that will capture CEPA 2.0's benefits are those that design supply chains with legal defensibility, treat CEPA as a regulatory framework rather than merely a tariff tool, and integrate customs, tax, and operational strategy from the outset. Certificate- driven compliance is dead. Documentary substantiation, audit-grade records, and proactive structuring are the new cost of market access.

Korean groups expanding in India have a choice: build compliance architecture now, or fund retrospective duty litigation later. The upgrade negotiations are active, customs enforcement is tightening, and the regulatory direction is clear. Those who act early will trade profitably. Those who wait will trade expensively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.