Custom That Costs Us Dear

Source: The post is based on an article “Custom That Costs Us Dear” published in the Times of India on 11^th August 2022.

Syllabus: GS 3 Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.; Governing Budgeting

 Relevance: External Sector; Ease of Doing Business

News: Since 2018-19, the government has switched from liberalism to protectionism on account of its import substitution.

History of tariff setting in India

(1) Since 1882, Britain had followed a policy of complete free trade in India. In 1894, it imposed 5% duty on imports meet revenue needs. However, it was simultaneously offset by an equivalent excise tax on domestically produced products in India. The custom duty was used with revenue roles instead of protective.

(2) The Indian Fiscal Commission of 1921-22 recommended that custom duty has a protective role to play, as initial protection is important to withstand foreign competition. A tariff board can be established to which industries could petition for grant of protective duties.

(3) First Tariff Board was appointed in 1923. Based on the board’s recommendation, the government granted protection to the iron and steel industry. Later on, more tariff boards were appointed between 1923 and 1939.

(4) With the advent of World War II, this practice of the grant of protection ended. Due to war, the government imposed strict and direct import controls through licensing.

(5) After the war, the government started liberalising controls. It ushered in an era of liberal trade policy ensuing. As a result, the Tariff Commission was created in 1951 in the prevailing liberal policy environment.

(6) In 1957-58, the balance of payments crisis ended this liberal era. In 1960s, strict import licensing regime was instituted.  Later on, the Tariff Commission was disbanded in 1976.

(7) In the 1970s, the licence-permit raj era was ushered in. The Revenue Department had the authority to set customs duties in India.

(8) In 1991 reform, the government eliminated import licensing. Tariffs were used for protection once again. India also introduced anti-dumping and safeguard mechanisms. The GOI revived the Tariff Commission in 1997. However, but it failed to effectively challenge the authority of the revenue department to set customs duties.

Trends of customs-duty since 2014-15

In 2014-15, the duty rates were increased and applied to less than 1% of all tariff lines and later on. However, later on, it was increased to 3-4% of all tariff lines.

In 2018-19, the then finance minister in his budget speech said, “I am making a calibrated departure from the underlying policy in the last two decades, wherein the trend largely was to reduce the customs duty. There is substantial potential for domestic value addition in certain sectors . . . To further incentivise domestic value addition … I propose to increase customs duty on certain items”.

In 2018-19, increased custom duty rates were applied to 42. 3% of all tariff lines. Further, the average of all customs duties was also increased from 13. 7% to 17. 7%, and other measures were also taken in this regard.

What are the issues the trade policies have taken so far?

The Custom duties have been hiked without doing adequate analysis, discussion or debate while making decisions.

The government has used custom duties as a revenue-raising instrument. But, a central principle of public finance does not allow the customs duties to be used like a revenue instrument.

Institutional flaw: The revenue department shouldn’t be the authority to impose customs duties. The Tariff Commission lacks necessary expertise and authority to influence the decisions of the revenue department.

The Way Forward

Increases in customs duties should be strictly reserved for protection to new industries.

The government should constitute an expert body which should be mandated to review high customs duties prevailing in many existing industries.