Issues associated with inverted import duties in India – Our import duty regime needs urgent correction

Source: The post India’s plan to fix inverted import duties, has been created, based on the article “Our import duty regime needs urgent correction” published in “Live mint” on 11th January 2024.

UPSC Syllabus Topic: GS paper 3 – Indian economy – Mobilization of Resources

News: The article discusses India’s plan to fix inverted import duties.

Inverted duty structure is a situation when inputs are taxed at higher rates than finished products, which can make domestic industry import dependent.

What are the problems with India’s import duties?

Increased Production Costs: Inverted duties elevate production costs. This impacts sectors like textiles and engineering, diminishing their global competitiveness.

Complex Tax System: India’s import tax system is marked by complexity, with multiple layers of tariffs and a perplexing inverted duty structure. This sector-specific, item-by-item tariff approach not only deters foreign investment but also undermines domestic manufacturing competitiveness.

Negative Global Perception: The rise in average import tariffs from 13.5% in 2014 to 18.3% in 2021 contradicts global trade trends, drawing international criticism.

Hindered Global Integration: High tariffs and a complex system make it challenging for Indian manufacturers to integrate into global value chains, crucial for economic growth in a globalized economy.

What government initiatives are in place to overcome these issues?

Inter-Ministerial Coordination: The commerce ministry has reportedly reached out to the finance ministry to rectify these distortions for over a dozen items in the Union budget, indicating a collaborative approach to tackle the issue.

Focus on Rationalization: Previous efforts focused on increasing tariffs on imported final products. The current initiative takes a broader approach, aiming to simplify the tariff system by reevaluating basic customs duties and other charges.

What should be done?

Revise Inverted Duty Structure: Reform the import duty system to lower taxes on inputs, particularly in critical sectors like textiles and engineering, to reduce production costs and enhance global competitiveness.

Simplify and Rationalize Tariffs: Make the tariff system more transparent and investor-friendly, to attract foreign investment and integrate Indian manufacturing into global value chains.

Question for practice:

Discuss how India is addressing the challenges posed by inverted import duties and their impact on manufacturing sectors and global trade.