Restructuring of Customs Duties

The basic thrust of customs tariff reform will be to place increasing reliance on tariffs to regulate and progressively reduce the role of quantitative restrictions. The move in this direction should increase revenues, encourage less import-intensive forms of production, moderate the unjustifiably high protection granted by quantitative restrictions to certain industries and reduce the delays and uncertainties associated with the administration of import licensing. At the same time, tariffs need to be tailored to reduce the enormous multiplicity of nominal and effective rates of protection conferred by the customs tariff structure. The reformed tariff structure also has to balance the advantage of cost reducing pressures from import competition against the need for adequate levels of protection for domestic industry and the necessity to earn and ration scarce foreign exchange and the need for revenue.

In carrying out tariff rationalization it is important to distinguish between the following broad categories of imports:

1. Capital goods;
2. Raw materials;
3. Other intermediate goods(including components and so called ‘universal intermediates’);
4. Essential consumer goods (e.g. food grains, edible oils, and life saving drugs);
5. Non-essential consumer goods.

Furthermore, in outlining a desired tariff structure for these categories of products, we must appreciate that in many cases the transition to the desired tariff rates will have to be phased over several years to avoid undue disruption of domestic industry.

Ideally, in the long run there is a strong case for subjecting all capital goods, raw materials, components and other intermediate products to the same rate of nominal tariff. This system, if it could be implemented, would have several important advantages. First, the substitution of the present multiplication of nominal tariff rates by a single rate would constitute enormous simplification for both trade and industry as well as for the customs administration. Second, this would vastly reduce incentive for misclassification of imports to evade taxes. Third, a single nominal rate of import duty would assure a uniform rate of effective protection (that is, protection of value added) at different stages of production of intermediate and capital goods. This would encourage the economy to specialize in those activities in which it has competitive strength.

However, as a practical proposition, at our stage of industrial development, a uniform system of nominal tariff rates for capital goods, raw materials and components may not be immediately feasible. Since domestic industry has grown under differential levels of protection in the past and different industries have attained varying degrees of maturity, a uniform system of duties may involve excessive social costs in the medium term. It may, therefore, be necessary to provide for some differentials in rates of duty for imports which are used at different stages of the manufacturing cycle. It is proposed to rationalism the customs tariffs in respect of intermediates components, capital goods, and other finished products along the following lines:

(i) There will be a two-tier structure of customs duties for raw materials and components. Thus, if the basic rate on components is set at X per cent, that on raw materials will generally be a somewhat lower Y per cent.
(ii) For certain ‘universal intermediates’ which are used in a large number of industries the objective or reform will be move towards a rate of customs duty even lower than Y per cent. This reduction of customs duty will only be possible as a part of a package to lower the cost of essential universal intermediates to Indian industry. Other elements of the package will include reduction of costs of indigenous production through increased efficiency. Where the universal intermediates are produced in the public sector, the Government will examine methods of reducing costs by writing off past capital investment. If despite this program of cost reduction, indigenous industry is unable to complete at the proposed customs duty rate on universal intermediates, it may be better to regulate competing imports quantitative control (including canalization) rather than through unduly high tariffs which have cumulative impact on the costs of production at subsequent stages.
(iii) Capital goods which are subject to quantitative import restrictions will be taxed at the same rate as raw materials, that is, at Y per cent. Capital goods, which compete with domestic industry, but which area allowed to be freely imported, will be taxed at X per cent.
(iv) This structure will be introduced over a period of time after industry wise examination. However, over a period of a few years, the higher duties will be reduced gradually to conform to the normal pattern. This will provide sufficient time for industry to readjust and reduce domestic costs of production.
(v) For administrative ease, project imports will continue to constitute a separate category, subject to duty at a lower rate. The categories of project imports will, however, be progressively reduced.
(vi) Tariffs for essential consumer goods, such as food, edible oils, lifesaving drugs and life-saving medical equipment will continue to be low or nil with the volume of imports regulated through canalization procedures.
(vii) Imports of non-essential consumer goods will continue to be banned.
(viii) In the process of giving a greater role to tariffs in regulating imports, steps will be taken to ensure closer coordination between tariff policy and policies regarding import licensing.