Customs duties are kind of little-known taxes that play a big role in shaping India’s economic balance of payment demography. Let us imagine what would happen if everything we imported suddenly became much cheaper. It might sound interesting, but economists know it could harm local businesses. Customs duties help strike a balance by making imports more expensive and protecting local industries. For instance, the higher price of imported mobile phones helps our domestic mobile phone manufacturers thrive and grow. Customs duties are taxes the government imposes on goods imported or exported from a country. Just think of them as toll taxes on roads that goods must pay to cross the border. These duties serve many essential purposes needed for the growth of a developing economy which are broadly 1) Revenue Generation, 2) Protection of Domestic Industries, and 3) Regulation of Trade.
Imagine buying a smartphone. The reason it’s more expensive in India compared to its price in its country of origin might be due to customs duties. These duties make imported smartphones costlier, encouraging consumers to consider locally manufactured alternatives, like those from Indian brands.
Another example is the seasonal fruit market. Suppose India has an abundance of mangoes. If export duties are low, most of the mangoes might get exported, leaving fewer for local consumers and potentially raising prices domestically. By imposing higher export duties, the government ensures more mangoes stay in the country, keeping prices stable for local consumers
There are several types of customs duties, each serving different purposes:
Import Duties: They are imposed on goods brought into the country. For example, when India imports crude oil, it imposes import duties to generate revenue and regulate the oil market.
Export Duties: Less common than import duties, export duties are taxes on goods leaving the country. For instance, India might impose export duties on certain food grains to prevent shortages within the country.
Other Related Tariffs:
Countervailing Duties: These are additional charges on imported goods that have benefited from subsidies in their home country, ensuring fair competition for local producers.
Anti-Dumping Duties: These are imposed to prevent foreign manufacturers from selling goods below cost to undermine local industries. For example, if a foreign company sells steel in India at a price lower than its production cost, India can impose anti-dumping duties to protect its steel industry.
India has strategically overhauled its basic customs duties to bolster domestic manufacturing and enhance its integration into global value chains. On July 23, 2024, Finance Minister Nirmala Sitharaman presented the Union Budget 2024-25, emphasizing significant changes in the customs duty structure. The budget outlines various measures to streamline customs duties, enhance local value addition, and bolster export competitiveness while ensuring consumer interests are protected. The finance minister proposed a slew of cuts on customs duties levied on various items. In her Budget speech, she announced that the government will conduct a thorough review of the customs rate structure over the next six months to streamline and simplify it, aiming to facilitate trade, eliminate duty inversion, and reduce disputes.
“My proposals for customs duties intend to support domestic manufacturing, deepen local value addition, promote export competitiveness, and simplify taxation while keeping the interest of the general public and consumers paramount,” Nirmala Sitharaman stated.
Key Reductions and Exemptions:
Precious Metals: Customs duties on gold and silver have been slashed from 15% to 6%, and on platinum to 6.4%. This move is expected to enhance market liquidity and stimulate demand in the precious metals market.
Electronics and Mobile Phones: The basic customs duty (BCD) on mobile phones, mobile Printed Circuit Board Assemblies (PCBA), and mobile chargers has been reduced from 20% to 15%. This reduction is expected to positively affect the final pricing of smartphones, making them more affordable for consumers. Notably, in January this year, the Union government had also reduced the import duty on many parts used in the manufacture of mobile phones from 15% to 10%. The products on which import duties were reduced in January include inputs used in the manufacture of battery covers, main lenses, back covers, antennas, SIM sockets, and other mechanical parts made of plastic and metal.
Medical Equipment and Cancer Drugs: Customs duties on critical cancer treatment drugs (Trastuzumab Deruxtecan, Osimertinib, and Durvalumab) have been fully exempted to provide relief to cancer patients.
The phased manufacturing program has introduced proposed changes to the basic customs duty (BCD) on X-ray tubes and flat panel detectors for medical X-ray machines.
Solar Energy: Customs duties have been fully exempted on 25 critical minerals essential for the manufacture of solar cells and panels. Additionally, BCD on two critical minerals has been reduced to support the renewable energy sector.
Chemicals and Petrochemicals:
BCD on methylene diphenyl diisocyanate (MDI), used in the manufacture of spandex yarn, has been reduced from 7.5% to 5%.
Exemptions on ferronickel and blister copper, along with continued concessions on ferrous scrap and nickel cathode, aim to lower production costs for MSMEs.
Leather and Textiles:
BCD on real down-filling material from duck or goose has been reduced to enhance competitiveness in the leather and textile sectors.
The export duty structure on raw hides, skins, and leather will be streamlined and optimized to improve trade efficiency.
Telecommunications: To rectify duty inversion, the government increased the BCD on specified telecom equipment while reducing it on parts used in local manufacturing.
The goal of India’s customs duty reform is to support homegrown industry and include the nation in international value chains. The reduction of tariffs on vital input materials, including electronics, precious metals, and important minerals, is anticipated to lower manufacturing costs for local businesses. This will promote a rise in domestic output and technological innovation. This tactic fits in with the larger goals of the government’s “Make in India” and “Viksit Bharat” initiatives, which aim to draw in foreign direct investment and generate employment. An emphasis on sustainable development and export competitiveness is also shown by the exclusions on items essential to the high-tech and renewable energy industries, which might boost India’s GDP growth and trade balance.
Nevertheless, these modifications entail an array of difficulties. The government may see a temporary decline in income because of reduced customs taxes. Streamlining the customs framework is a multifaceted endeavor that needs meticulous strategizing and implementation. Moreover, fluctuations in international markets may impact the efficiency and affordability of domestic production. Although there are obstacles to overcome, the potential advantages are significant. Reducing tariffs may enhance the worldwide competitiveness of Indian goods, entice more foreign investment, and facilitate the growth of a highly trained labor force. India can attract investments towards environmental responsibility by prioritizing green technologies and sustainable practices. This would contribute to the country’s long-term economic prosperity and stability.
