Budget proposal: A departure from the custom of duty cuts to ‘protect domestic industry’

The Budget announcement to hike duty on two broad categories of goods is one among several such increases introduced in the last two years to protect domestic manufacturing, according to the government, but experts say the move is also aimed at shoring up revenues

Written by Aanchal Magazine , Anil Sasi | New Delhi | Published: February 6, 2018 6:25:27 am
Budget, domestic industry, Custom duty, Budget 2018, FY 2018-19, India news, business news, Indian express news Since early 2016, when attempts to get the domestic industry to rekindle the investment cycle failed, the government has increasingly resorted to tariff hikes to signal an incentive for domestic investors. (Illustration: C R Sasikumar)

The hike in customs duties on 46 items in the FY19 Budget, while marking a “calibrated departure” from the underlying policy of reducing import duty over the last two decades, is also in contravention with a proposal debated by the government’s policy think-tank Niti Aayog, in the run-up to last year’s Budget to effectively bring tariffs down in line with corresponding duties in the ASEAN bloc.

The hike in customs duty on these 46 items is mainly across two broad categories of goods — imported branded goods and those involving technological value-addition — where duties were mostly raised from the 10 per cent bracket to 15 per cent and 20 per cent, with one segment seeing a five-fold increase in duty to 50 per cent.

Prior to the large-scale hikes, India’s peak customs duty — the highest of the normal rates — on non-agriculture products had come down steeply from 150 per cent in 1991-92 to 40 per cent in 1997-98 and subsequently, to 20 per cent in 2004-05 and 10 per cent in 2007-08. At the Niti Aayog pre-Budget meeting on December 28, 2016 that was attended by Prime Minister Narendra Modi, a proposal to further harmonise the peak customs duty at 7 per cent was discussed, with the aim of both bringing the import tariffs in line with ASEAN duties and addressing the issue of “duty inversion” — when the tariffs on finished goods are lower than that on components and raw materials — that hurts domestic manufacturing.

The latest move in the FY19 Budget, however, has a clear pattern to it. Since early 2016, when attempts to get the domestic industry to rekindle the investment cycle failed, the government has increasingly resorted to tariff hikes to signal an incentive for domestic investors.

January 28, 2016: Concessional customs duties on 76 specified drugs withdrawn through a notification “to eliminate the disadvantage to the domestic manufacturers of such drugs”. Subsequently, with the Ministry of Health and Family Welfare citing an impact of the move on the prices and availability of these drugs, the concession of customs duties on three drugs — Octreotide; Somatropin; and Anti-Haemophilic factor concentrate VIII & IX — was restored through another notification on February 17, 2016.

June 30, 2017: Notification issued to slap a basic customs duty on smartphones of 10 per cent effective from July 1, making imported devices more expensive than locally made ones. The department of revenue said that the government took the decision “on being satisfied that it is necessary in the public interest so to do.” The duty covered cellular mobile phones and specified parts of cellular mobile phones like charger, battery, wire headset, Microphone and Receiver, Key Pad, USB Cable etc.

December 16, 2017: Notification issued to raise customs duty on imported mobile phones, television sets, digital cameras, microwave ovens, LED bulbs and a number of other electronics goods. The duty on push-button phones and mobile handsets was raised to 15 per cent from 10 per cent and that on TV sets to 20 per cent from 15 per cent .

September 2017: A duty on solar panels was imposed following a notification from the Central Board of Excise and Customs in September 2016, under which solar panels and modules generating power have been classified alongside “electrical motors and generators” under the Customs Act, thereby attracting a 7.5 per cent duty. They were earlier listed with “diodes, transistors and similar semiconductor devices, photosensitive semiconductor devices, including photovoltaic cells, whether or not assembled in modules or made up into panels,” where import were duty free. The implementation of this levy began a year later in September 2017 at some ports and comes despite opposition from the New and Renewable Energy ministry.

These notifications effectively signaled a gradual policy shift, as the peak customs duty rate for many electronic products was effectively increased from 10 per cent to 15 per cent or 20 per cent and these measures had been taken by invoking the emergency powers under the customs laws. The duty hikes that were announced in the FY19 Budget practically cemented this new policy and signaled a reversal of the duty cuts of the past, coming exactly a week after Prime Minister Narendra Modi mounted a defense of globalisation at the World Economic Forum in Davos and said that “instead of globalisation, the power of protectionism is putting its head up”. During his foreign visits last year, Finance Minister Arun Jaitley too had also spoken against protectionism several times — in the US in April, in Japan in May and South Korea in June 2017. “The attempt to change the discourse from opening up and focusing on competitive advantage to increased protectionism will only hurt the global economy and welfare of people,” Jaitley had said at the International Monetary and Financial Committee (IMFC) in Washington D.C during his visit in April last year.

Alongside the hike in duties, the cess on most of these goods was also jacked up, with the abolishment of Education Cess and Secondary and Higher Education Cess on imported goods and in its place imposition of Social Welfare Surcharge. This would translate into an additional impact of 7 per cent to be levied on aggregate duties of customs on import of goods (increased from earlier 3 per cent to 10 per cent) across-the-broad, excepting for petrol, diesel, silver, gold and mobile phones, and some sectors where cess was not leviable earlier.

A senior government official defended the decision by stating that this was being done “to protect our MSME” and that there was “” a marginal rate increase”. “The idea is that there are countries of the world…who try to systematically dump those goods, which are manufactured only by MSMEs in India. Now, MSMEs don’t have the capacity to go in for anti-dumping procedure because they don’t know what are the statistics in China, they will have to present a case that this company’s cost of production is this much, they are selling in domestic market at this rate etc. So, that’s why the government has to proactively protect their interest by marginal increase in the customs duty… other than electronics, all other items are MSME items — furniture, footwear, toys, video game,” the official told The Indian Express.

Analysts, however, are skeptical of this line of argument. “The hike in customs duty has been mainly for two categories of goods — imported branded goods and those requiring technological orientation. For example, radial tyres require technology which is available to 5-6 companies in the world. Branded products like sunglasses, fruit juices toiletries such as perfumes are more of the kind of products that people prefer buying… The argument that customs duty hikes will promote domestic manufacturing is only partially true for goods like toys and games. But, even in those sectors, companies will take at least 2-3 years to come up,” a Mumbai-based analyst said.

Also, the tyre sector is among the most cartelised industry, after the cement sector, and has been lobbying for the imposition of anti-dumping duty on imports from China for long, the analyst said.

More than protectionism, there is a sense that the customs duty has been increased intelligently on goods used by the well-off to shore up revenues, especially to overcome the hole created by GST collections. “Other compliance measures such as reverse charge mechanism, invoice matching and e-way bill are riddled with issues and have the potential of making the government unpopular. The government had proposed e-way bill system, but it is yet to take off. Industry has gotten used to seamless movement of goods across borders over the six-seven months. No one would like trucks to pile up and therefore, unless the GST (Goods and Services Tax) collections go up substantially, the government will resort to such tariff hikes,” an analyst said. Customs duty hikes are more palatable and easy. The Centre’s revenue share has also suffered because after the rollout of the GST, countervailing duty (CVD) and additional special duty (SAD) of customs have been subsumed into Integrated GST (IGST). Subsequently, IGST credit can be set off against IGST or Central GST (CGST) or State GST (SGST), whereas in earlier regime, these duties completely accrued to central government only. The hiked customs duty is estimated to result in revenue flow of about Rs 6,000 crore annually.

Industry is predictably cheering the move. “The industry welcomes the Budget, particularly the push for local manufacturing of mobile phones and consumer electronics by increasing customs duty on imported products and components, a move that is consistent with the government’s Make-in-India initiative,” said Manish Sharma, president and CEO of Panasonic India and South-Asia, also president of the Consumer Electronics and Appliances Makers Association.

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