India: India's Customs Tariff Policy: Clear, Unambiguous And Truly Evolved

The two T's of cross border i.e. tension and trade, are best addressed with a clear policy. The good news is that Union Budget 2021 sets out India's tariff policy for cross border trade in clear and unambiguous terms. 

The budget moves on customs tariffs, focused in letter and spirit on (a) safeguarding indigenous industry; (b) promoting value addition in certain sectors to be part of the global value chain; and (c) reducing cost of inputs and correcting the problem of inverted duty structure.

INCENTIVIZING IMPORTS

Carefully incentivizing raw material imports and blocking that of finished goods or ones that are indigenously manufactured in quantities that not just suffices domestic demand but also caters to the export market. Custom duties for industries, for example, chemicals, cut and polished stones, safety glasses and parts of signaling equipment, metal products such as screw, nuts where there is sufficient local capacity were hiked to discourage imports., etc.

To promote value addition in certain sectors, import duty has been freshly imposed or hiked, as the case may be. This has been done for goods such as solar inverters, parts of mobile phones, compressors for refrigerator/air‑conditioners. This aims to enable manufacturers to onshore majority value addition processes undertaken in course of the manufacturing.

CORRECTION OF DUTY RATES

The next measure involved correction of duty rates that either led to inverted duty structures or were causing an unwarranted increase in pricing of raw materials.  Beneficiaries include sectors such as textiles, ferrous and non-ferrous metals, naptha, precious metals, etc. This has come as a huge relief to the importer communities as they have been advocating this cause with the Government for a long time. It is indeed heartening to see that policy makers are not just hearing but also positively acting on representations.

With all the jubilation about tariff moves, an issue which initially created an enormous buzz was the new agri-infra development cess proposal. While it was feared that the cess would be inflatory, the actual picture is quite different. Although it is a new levy, the cess will not add a duty load on importers, since corresponding basic customs duty has been suitably adjusted in most cases.  This is emphasized by the fact that several affected sectors, alcoholic beverages for example, have made it clear that this cess will not lead to increase in pricing of the final product.

Simply put, the undercurrent of these proposals, is that India has taken a definitive stand on its tariff policies. The policy has clearly challenged cheap imports, discouraged pseudo manufacturing such as assembling/ aggregation and encouraged exports from India. 

In a bid to further showcase its intent on the tariff policy front, the Finance Minister indicated that lawmakers will now review as many as 400 old customs exemptions on stringent norms of requirement and anything which is not in sync with the Government's vision will be cancelled.  This is unheard of; it's a painstaking job and it is being well done.

WHAT TO EXPECT

Expect more and more rationalization. The government is on the lookout for inefficiencies and would weed it out as soon as identified. For instance, several end-use based exemptions today warrant varying compliances. The government has taken up the mettle to standardize these compliances at the earliest.

Further, new exemptions would not come for indefinite period. The same, if at all, would be notified for a purpose and with a life span of about two years. If one observes carefully, this roadmap suggests that the administration would act to help and support, but the beneficiary has to eventually stand and learn to manage on its own.

Finally, the peculiarity of this new explicit policy is that it makes room for adjustments immediately.  Metal prices, steel in particular is exponentially rising and the Government has already cautioned domestic players.  In a bid to ensure that costs of such items do not disrupt cost sheets of various other projects, infrastructure included, the government is taking head on measures. Illustratively, anti-dumping duty/countervailing duties on various steel products from China/ Indonesia, etc are being temporarily suspended or revoked to balance out product prices and support projects and industry against inflation.

A few naysayers have denounced these policy measures. They may indeed be protectionist in their approach; however, they clearly lay out the long-term plan for achieving India's vision of being a global manufacturing hub.   This also sends out a clear message to industries which have not been particularly impacted by these current tariff changes. Businesses should augment future plans to suit India's evolving policy towards localization as in time all industries will be similarly impacted. India is only aiming for a higher and meaningful value addition by onshoring of critical manufacturing processes. The trade constituents will have to be aligned accordingly.

This article has been printed in the Economic Times

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