Finance minister Arun Jaitley is likely to restructure import duties on a host of raw materials and intermediates in a bid to boost domestic manufacturing, which is central to the BJP’s vision of making India a global production hub. The manufacturing sector had suffered a 0.7% output contraction last fiscal.
Finance ministry sources said correcting the inverted duty structure — or the problem of raw materials being subjected to higher taxes than the finished products — was a priority and had therefore asked for specific inputs on products, their uses, turnover and other details from industry. It is also part of the finance ministry’s broader objective of simplifying the tax structure.
The idea is to ensure to the extent possible that import tariffs are graded in such a way that in any value chain finished products attract the highest duty, the intermediates relatively lower taxes, and raw materials the lowest.
Giving tariff protection to certain items in a product’s value chain or allowing concessional import of final products under various free trade agreements (FTAs) discourages the use of imported raw materials for local production of final goods. Although this issue had been identified a decade ago and based on suggestions from expert committees, corrective steps have since been taken in case of several industrial sectors, the problem lingers in sectors like automobile components, IT and electronic products, some petrochemical products, paper, edible oil, tyres, pharmaceuticals and capital goods.
The solution involves reducing the basic customs duty (BCD, which represents import tariff) on imported raw materials to below the level of that on finished products or at least to bring parity.
Scrapping or lowering the 4% special additional duty (SAD) could also help address the issue partially. SAD was introduced to equalise the tax incidence on an imported item with that of a locally produced item, which earlier attracted 4% central sales tax. Since CST has now been reduced to 2%, the comparable tax on imported items too need to be brought to the same level, explained Pratik Jain, partner, KPMG.
If an imported component attracts 12% countervailing duty (CVD) and another 4% SAD on that, the total duty incidence on the raw material comes to 16.48% (assuming basic customs duty is zero), but the domestic producer of the final product would be able to avail of tax credit only against the 12% excise duty payable on the finished product. This leads to accumulation of input tax credit, which a local manufacturer will never be able to utilise.
“In the case of IT and electronic products (where the BCD is zero), the prevailing CVD of 12% and SAD of 4% is a major disincentive for local manufacturing as the effective duty rate on account of CVD and SAD comes to approximately 16.48% as against the effective excise continued…