India’s Customs Duty Landscape: A Shift Towards Simplicity and FTA Alignment?
New Delhi – A significant overhaul of India’s customs duty structure could be on the horizon, potentially impacting businesses across the nation. With over ₹1.52 lakh crore currently tied up in customs duty-related litigation, the government is reportedly considering an amnesty scheme for the 2026-27 Budget, according to Price Waterhouse & Co. This move, coupled with a proposed reduction in customs duty slabs, signals a potential shift towards a more streamlined and predictable trade environment.
The Burden of Complexity: Why Duty Slabs Need Rationalization
Currently, India operates with an 8-slab customs duty structure. This complexity often leads to ambiguity and, consequently, disputes. Reducing this to 5-6 slabs, as suggested by Price Waterhouse & Co. Principal Gautam Khattar, would simplify compliance and reduce the potential for misinterpretation. This isn’t just about ease of doing business; it’s about unlocking significant capital currently frozen in legal battles. Consider the case of textile manufacturers, who frequently face inverted duty structures – where import duties on raw materials exceed those on finished goods – hindering their competitiveness. A streamlined system could directly address these imbalances.
The push for rationalization is further fueled by India’s growing network of Free Trade Agreements (FTAs). FTAs with countries like New Zealand, the UK, and Oman, and ongoing negotiations with the EU and USA, are designed to lower trade barriers. However, these agreements can inadvertently create ‘duty inversion’ – a situation where finished products are cheaper to import than the raw materials needed to manufacture them domestically. This undermines local industries and discourages manufacturing. For example, the automotive component sector has repeatedly highlighted this issue, with imported parts sometimes facing higher duties than fully assembled vehicles.
Pro Tip: Businesses should proactively analyze their supply chains to identify potential duty inversion issues and prepare for potential changes in customs duty rates. Staying informed about ongoing FTA negotiations is also crucial.
The Amnesty Scheme: A Path to Resolution?
The ₹1.52 lakh crore locked in customs duty litigation represents a substantial drain on resources for both businesses and the government. An amnesty scheme, offering a one-time settlement of disputes, could provide much-needed certainty and allow companies to focus on growth rather than legal battles. Industry bodies have been actively lobbying for such a scheme, arguing that it would free up capital and reduce the administrative burden on customs authorities. Similar amnesty schemes have been successfully implemented in other countries, such as Brazil, to resolve long-standing tax disputes.
Beyond Duty Rates: The Importance of Trade Facilitation
While duty rates are critical, efficient customs clearance processes are equally important. Faster customs clearances reduce lead times, lower inventory costs, and improve overall supply chain efficiency. The expectation is that Budget 2026-27 will prioritize trade facilitation measures, potentially through increased automation, simplified documentation requirements, and enhanced risk management systems. The implementation of the Turant Customs initiative, aimed at automating customs processes, is a step in the right direction, but further investment and expansion are needed.
Did you know? India’s ranking in the World Bank’s Trading Across Borders indicator has improved in recent years, but there is still significant room for improvement compared to global leaders like Singapore and Denmark.
The Impact of FTAs: A Double-Edged Sword
India’s aggressive pursuit of FTAs is a strategic move to boost trade and investment. However, maximizing the benefits of these agreements requires careful calibration of customs duties. The government needs to ensure that FTAs don’t inadvertently disadvantage domestic industries. This requires a dynamic approach to duty adjustments, taking into account the specific impact of each FTA on different sectors. For instance, the India-Australia Economic Cooperation and Trade Agreement (IA-ECTA) has led to increased imports of Australian agricultural products, prompting calls for safeguards to protect domestic farmers.
FAQ: Customs Duty Changes in India
- What is duty inversion? Duty inversion occurs when the import duty on raw materials is higher than the duty on the finished product, making it cheaper to import the finished product than to manufacture it locally.
- What is an amnesty scheme? An amnesty scheme is a one-time opportunity for businesses to settle outstanding customs duty disputes by paying a reduced amount.
- How many customs duty slabs does India currently have? India currently has 8 customs duty slabs.
- What are FTAs? Free Trade Agreements are agreements between two or more countries to reduce trade barriers and promote economic cooperation.
- Will these changes affect small businesses? Potentially. While the aim is simplification, small businesses should stay informed about changes to ensure compliance and take advantage of any benefits.
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