Lowering Import duty

What is the issue?

There has been a strong case for lowering of import duties in India, which has to be followed with elaborate product standards and non-tariff measures.

What are the advantages of lowering duties?

• Increase exports - India’s overall share in world goods trade is only 1.7%.
• Import duties and time taken at the port/Customs is the major reason for a low share of Indian exports in global value chains.

• Since the complex production process requires goods to cross borders several times at different stages, any duty charged has a cascading and accumulative effect on trade.
• Thus, a reduction in import duty and quick clearances at the port/Customs will improve the situation and help Indian exports.
• Improve ease of doing business - For industrial goods, India’s average rate of import duty is 10.2% while the weighted average import duty is only 5.7%.
• The significant difference in the two numbers is because some of the key imports attract low duty and large value of imports are allowed end-use specific exemptions.
• Lower duties will do away with the need for grant of many exemptions which make implementation complex.
• This will also avoid smuggling, evasion, litigation, and corruption which are the consequence of higher duties.
• Reduce the need for export schemes -  Many exporters use duty exemption schemes to import inputs and machinery needed for making an export product at zero duty.
• Low import duties will reduce the need for such export schemes.
• Duty Drawback is the rebate of duty chargeable on imported material or excisable material used in the manufacturing of goods that are to be exported.
• The exporter may claim drawback or refund of excise and customs duties paid by his suppliers.
• Lower import duties will reduce the government spending under the duty drawback scheme.  
• Further, over-invoicing of exports will be avoided since there will be less possibilities of duty drawback from the government.

What should be done?

• Robust trade policy regime – High tariffs are usually levied by domestic governments to protect new industries against foreign competition.
•  India generally levy high tariffs on imported goods, making domestic goods cheaper for domestic consumers and imported goods more expensive.
• However, once a Free Trade Agreement (FTA) is signed with a country, imported goods will become cheaper than the domestic goods.
• As a result, their firms gain more price advantage in India from an FTA agreement.
• Thus, reform of Customs duty regime in India is needed to avoid the impacts of FTA on domestic industries.
• Differential tariffs - The top 50% imports in value are concentrated in only 25 lines relating to crude oil, gold, diamonds, mobile phones, telecom products, etc. which are mostly low-duty products.
• India collects more than 85% of basic customs duty from less than 10% of tariff lines. 
• Thus, India can identify 15% of industrial tariff lines as strategic and retain the current level of duty on them.
• On the other hand, duties on raw materials and intermediate goods that will go on to make an industrial product can be reduced.
• Non-tariff barriers - India have to switch to the usage of non-tariff barriers such as product standards to control unwanted imports.
• Lower duty regime works best in tandem with elaborate standards and non-tariff measures regime.
• Thus, there is a need to set up quality and standard infrastructure to ensure that the duty reduction measures will be accompanied by importing high quality imports, without violating our commitments at the WTO.

Source: Business Line