A significant revision of customs duty on over 100 items is expected in the FY26 Budget. This effort aligns with the government’s push to simplify trade practices, eliminate inverted duty structures, and promote domestic production. Finance Minister Nirmala Sitharaman had first proposed this review in her FY25 Budget speech.
Addressing Inverted Duty Structures
The inverted duty structure occurs when raw materials attract higher import taxes than finished goods. Industries like electronics, textiles, and automobile parts face this challenge, making local production costly. The Confederation of Indian Industry (CII) has proposed sector-wise duty adjustments to resolve this issue and foster competitiveness.
Key Proposals
- Duty Rationalization: NITI Aayog suggests reducing duties on raw materials to nil-2.5%, intermediaries to 2.5-5%, and finished goods to 7.5-10%.
- Sectoral Focus: Critical industries like steel, aluminium, solar batteries, and polymers require rationalized rates to boost domestic output.
- Free Trade Agreement Adjustments: Reviewing existing FTAs could mitigate duty discrepancies.
Impacts on Manufacturing
Current customs rates often favor finished goods imports over raw materials, impacting local production. Rationalizing duties will:
- Encourage domestic sourcing of inputs.
- Reduce manufacturing costs.
- Enhance India’s global trade presence, particularly in electronics, with a $500 billion target by 2030.
Challenges in Implementation
Experts note that not all duty structures perceived as inverted can be corrected. CBIC chairman Sanjay Kumar Agarwal highlights the need for a thorough evaluation of an item’s value within finished goods to ensure practical duty adjustments.
Conclusion
The proposed overhaul in customs duty for FY26 aims to address longstanding trade issues, enhance India’s manufacturing competitiveness, and align with global practices. With sector-specific consultations underway, the reforms hold potential to significantly boost India’s industrial growth.
