India must rationalize its import duty regime
Indian policymakers are expected to fix inverted import duties for sectors like textiles, leather and engineering goods, so that inputs are not charged at a higher rate than ready-to-use products. The commerce ministry has reportedly reached out to the finance ministry to sort out such distortions for more than a dozen items in the Union budget. Manufacturers have long sought corrections, as high input duties increase local production costs, but government action has been slow.
Still, it’s a good sign that another attempt may soon be made. After all, enlarged domestic costs not only make it harder to compete overseas, it can even mean that imports work out cheaper in many cases in spite of tariffs on finished products. Hence, an inverted duty regime tends to work against ‘Make in India.’ In any case, for Indian factories to participate more in global value chains, we must rationalize our tariff regime so that it is not an outlier amid globally sprawled participants with lower charges, and assure investors of rate stability in the future.
To be sure, several duty inversions have already been addressed by the government over past years. In some of these cases, however, the apparent fix took the form of tariff hikes on final-product imports. Also, an item-by-item approach has proven insufficient to untangle a jumble of complications we have ended up with.
Apart from basic customs duty, there are other levies, with duty drawback and remission schemes covering several sectors. Some input items are said to serve multiple ends that are taxed differently, so what’s an inversion in one case may not be for another. The very complexity of our entry levies could deter businesses looking at factories located in India as links in
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