Time To Step Up and Step Out

Context: Corporate India has lobbied Finance Minister of India for competitive tariff regime.

Problems in India’s Custom Tariff Regime:

• Issue with the tariffs:
  • Rising tariffs: While lowering customs duty has been the mantra for policy reforms since 1991 (peak duty being lowered to 10% from 150%), there have been signs of reversal.
  • Complex structure: consisting of basic tariffs, cesses, assorted exemptions and end-use restrictions on imports.
  • Perpetuates protectionist mindset: (raises production inefficiency, increases input costs for user industries, hurts exports and prompts retaliation by trading partners).
• Erosion of tax base: due to widening gap between tax rate to Most Favoured Nation (17.1%) and average effective tariff rate (2.6%).
  • It also shows how special treatments lower the revenue potential from import duties.
  • Customs duty revenues accounted for just 0.6% of GDP in 2018-19, compared to BRICS and ASEAN economies (1.2%).

Way Forward:

• Converging multiple rates into a single MFN rate (5%): (except farm products) and removing exemptions will ensure higher revenues without disturbing the relative prices of goods and services.
  • Adopt a uniform import duty of 5% on raw materials, intermediate and final goods instead of a graded roadmap towards competitive tariffs (as suggested by Confederation of Indian Industry).
• Join trading blocs to benefit from global value chains: like Regional Comprehensive Economic Partnership (RCEP) to protect its interests stand up to China, besides seeking access to services.
• Implementation of Nontariff reforms: for prioritising expeditious clearance and certainty of obligations
  • India has drawn up the National Trade Facilitation Action Plan (NTFAP), a sort of TFA-plus.
  • Reducing both tariff and nontariff barriers would nudge local producers to compete with the world in the local market.
• Ensure revamped and more comprehensive Customs Authority for Advance Rulings (CAAR): it will help in faster dispute resolution and reduce cargo-release time.

Conclusion: India must align its custom tariff regime with global manufacturing hubs to join global supply chains and realise its potential to be an economic powerhouse.