India's Customs Overhaul: A Blueprint for Competitive Trade

India must reform its import tariffs and customs administration to reduce trade costs and boost manufacturing competitiveness, according to the Global Trade Research Initiative. The report highlights the need for tariff rationalization, improved export incentives, and streamlined customs procedures to align with India's trade ambitions.

A report by Global Trade Research Initiative (GTRI) argues for the comprehensive reform of India's import tariff and customs systems to enhance trade efficiency and boost the country's manufacturing sector. It outlines the necessity for changes encompassing tariff policy, customs procedures, export incentives, and manpower deployment.

The report suggests that collectively implementing these measures would transform India's customs framework from a control-oriented system to a growth-oriented institution, contributing to the country's manufacturing and supply-chain goals. This comes as India reports merchandise trade exceeding USD 1.16 trillion, with customs clearances accounting for nearly 29% of the GDP.

Amid global companies reevaluating their sourcing locations due to geopolitical changes, the report emphasizes that even minor inefficiencies can have widespread economic repercussions, such as increasing input prices, delaying shipments, and diminishing export competitiveness. Finance Minister Nirmala Sitharaman's pledge for customs reform offers a unique policy opportunity; however, GTRI cautions against fragmentary improvements.

Central to the recommendations is the reformation of India's import tariffs. The report contends that tariffs have become ineffective as revenue instruments and continue to mislead production decisions, with customs duties making up just 6% of gross tax revenue and averaging only 3.9% of import value.

The current tariff revenue distribution is heavily skewed, with almost 90% of import value concentrated in fewer than 10% of tariff lines, while the bottom 60% of lines generate less than 3% of revenue. This complexity imposes significant administrative burdens with low fiscal returns.

The GTRI recommends zero duty on most industrial raw materials, a 5% standard duty on finished goods over three years, elimination of inverted duty structures, and rationalization of extreme tariffs like the 150% duty on alcohol. These changes would enhance domestic manufacturing competitiveness while reducing evasion incentives.

Beyond basic tariffs, the report highlights the need to simplify a complex array of additional cesses, surcharges, and trade remedies that complicate the effective tariff landscape. Moreover, it calls for a revamp of the intricate customs notification system, suggesting a unified online schedule of duties and self-contained notifications for clarity.

(With inputs from agencies.)